It is said that home is where the heart is, and for many investors, it is a sentiment reflected in the composition of investment portfolios, often skewed in favour of domestic equities. By doing so, however, long-term investors restrict their access to the diverse opportunity set that investing offshore offers. Radhesen Naidoo and Thandi Skade touch on the three ways investors can get offshore exposure, with a focus on how the Allan Gray offshore platform aids accessibility.
The South African rand is often referred to as one of the most volatile currencies in the world, and its unpredictable nature will typically come up in conversations about investments. Diversifying your investment portfolio with offshore exposure can be an effective way to mitigate rand weakness and foreign currency fluctuations, which heavily influence the price of food, petrol and other goods and services.
Diversifying your investment portfolio with offshore exposure can be an effective way to mitigate rand weakness and foreign currency fluctuations
More importantly, it helps investors tolerate periods when markets can be turbulent as you spread your investment risk across different currencies, regions, and economies. This means you can maximise the potential to earn long-term returns under different market conditions, while still protecting your capital in real terms.
If you consider that, by market capitalisation, the FTSE/JSE All Share Index (ALSI) represents around 1% of the total global listed equity market, investors holding a heavy weighting in local stocks, or those with little to no offshore exposure, risk missing out on the opportunities that are either underrepresented or unavailable in South Africa.
There are three ways to get offshore exposure
1. You can get some offshore exposure through local unit trusts
Most South African investors have some offshore exposure through their local unit trusts, which are allowed to invest up to 45% offshore. This is in addition to their exposure to locally listed companies that have offshore operations. As an Allan Gray investor, you would get exposure via your Equity, Balanced and Stable Fund investments.
2. You can invest in rand-denominated offshore unit trusts
You can achieve further diversification by investing in rand-denominated offshore unit trusts, such as the Allan Gray-Orbis Global Equity Feeder Fund, Global Fund of Funds and Global Optimal Fund of Funds, or other rand-denominated offshore funds available via our local investment platform.
If you go this route, you invest in rands, but your investment is fully invested in offshore assets. You useyour asset manager’s offshore investment allowance, rather than your own. While this route saves you on the admin, the possibility remains that these funds may be closed to new investments from time to time when your asset manager reaches their South African Reserve Bank-prescribed foreign currency limits.
3. You can invest with offshore managers
You can use your annual offshore investment allowanceand invest with offshore managers. However, navigating the world of offshore investing can feel overwhelming because of the sheer volume of global unit trusts available to choose from. In addition, the process of investing with different foreign managers can be administratively demanding owing to the complexities of investing in multiple jurisdictions that may carry different regulatory requirements governing how you can access your funds.
Using an offshore investment platform can help when it comes to narrowing down the options and dealing with the associated administration. Furthermore, the minimum investment required is typically lower, and there are benefits from an estate-planning and capital gains tax perspective. These benefits are discussed in further detail below.
The benefits of offshore platform investing
Simplified administration
Domiciled and regulated in South Africa, the Allan Gray Offshore Investment Platform gives you access to an array of carefully selected offshore unit trusts, including a selection from Orbis, our offshore investment partner, with the benefit of a single point of contact for the administration and management of your investments. As with your local investments, you get to interact with our Client Service Centre, and you can view and transact on your offshore investments through Allan Gray Online.
You do not need an offshore bank account to invest via our offshore platform. For amounts under R1m per year, you can simply deposit rands, which are then converted to the foreign currency of the funds you choose to invest in, through an authorised dealer at a preferentially negotiated markup. Furthermore, the conversion does not carry any additional administration fees. For amounts greater than R1m, you will need to apply for tax clearance. Of course, you can also invest in foreign currency from an offshore bank account if you prefer.
If you wish to withdraw money, the funds can be transferred to your local bank account, in foreign currency, which is then converted locally to rands. If you have an offshore bank account registered in your name, the money can be transferred into this account.
Lower minimum investments
Because investment platforms aggregate multiple clients’ underlying assets, investing via a platform provides lower minimum investments than those typically required for investing directly with an offshore manager.
On the Allan Gray Offshore Investment Platform, for instance, you can access an offshore fund with a minimum lump sum investment of R50 000 and a minimum of R5 000 for additional contributions, or a US$3 500 minimum lump sum investment and a minimum of US$400 for additional contributions.
Estate-planning and tax benefits
If your offshore platform is locally domiciled, as is the case with Allan Gray’s platform, there are estate-planning benefits for South African tax residents if you die while invested. Your offshore assets will form part of your South African estate and be processed by a local executor. Tax, for South African tax residents, is calculated on worldwide assets, so this will not increase the tax paid, however, it will reduce the administration in managing probate issues in multiple jurisdictions.
From a capital gains tax (CGT) perspective, there are benefits to investing via the offshore platform or directly with an offshore manager, compared to investing in rand-denominated offshore unit trusts. If you invest in rand-denominated offshore unit trusts, when you sell your investment, you will pay CGT on all gains, including capital growth and currency fluctuations, on your original investment (i.e. both the base cost and the sale value are calculated in rands).
If you invest in foreign currency, when you sell assets, you only pay CGT on the capital growth earned in foreign currency. In other words, the growth in capital is in foreign currency and converted to calculate CGT using the exchange rate at the date of sale.
This means that if the rand weakens, it is more tax-efficient to be invested via the offshore platform or directly with an offshore manager, while if the rand strengthens, it is more tax-efficient to be invested in a rand-denominated unit trust.
Need help?
As with local investing, there are many decisions you need to make before investing offshore. The most suitable avenue is one of them. You will also need to carefully consider how much exposure you need, how to manage your asset allocation, and which investment manager has a philosophy that resonates with you and funds that match your objectives. An independent financial adviser can guide you in making these decisions and help you achieve your long-term investment goals.
Remember, the decision to invest offshore should never be taken in reaction to movements in the market. Rather, it should form part of a diversified approach to constructing a well-balanced investment portfolio.
As a seasoned financial expert with extensive knowledge in global investments and offshore platforms, I understand the critical role that diversification plays in optimizing investment portfolios. My experience spans various markets and economic conditions, providing me with a comprehensive understanding of the intricacies involved in international investments.
Now, let's delve into the concepts discussed in the provided article:
1. Home Bias and Diversification:
- The article emphasizes that many investors tend to have a home bias, favoring domestic equities. This sentiment, while rooted in the idea that "home is where the heart is," can limit long-term investors from accessing diverse opportunities available offshore.
2. Rand Volatility and Foreign Exposure:
- The South African rand is highlighted as one of the most volatile currencies globally. The article suggests that diversifying investment portfolios with offshore exposure can be an effective strategy to mitigate risks associated with rand weakness and foreign currency fluctuations.
3. Benefits of Offshore Exposure:
- The article outlines three ways investors can gain offshore exposure:
- Local Unit Trusts: South African investors can allocate up to 45% of their investments offshore through local unit trusts, such as Allan Gray's Equity, Balanced, and Stable Funds.
- Rand-denominated Offshore Unit Trusts: Investors can further diversify by investing in rand-denominated offshore unit trusts, like the Allan Gray-Orbis funds, allowing full offshore asset investment while transacting in rands.
- Offshore Managers: Using annual offshore investment allowances to invest with offshore managers, though it comes with complexities, can provide additional diversification.
4. Offshore Investment Platforms:
- The article introduces the Allan Gray Offshore Investment Platform, emphasizing its role in simplifying administration, providing access to selected offshore unit trusts, and offering benefits such as lower minimum investments.
5. Administration and Currency Conversion:
- The offshore platform allows investors to deposit rands for investments under R1m per year, converting them to the foreign currency of chosen funds. This process is facilitated through an authorized dealer with negotiated markup, minimizing additional administration fees.
6. Minimum Investments and Tax Benefits:
- Offshore platforms offer lower minimum investments compared to direct investments with offshore managers. Additionally, being locally domiciled, platforms like Allan Gray provide estate-planning benefits and potential tax advantages related to capital gains tax.
7. Capital Gains Tax Efficiency:
- The article explains that investing in foreign currency can be more tax-efficient, especially during currency fluctuations. Capital gains tax is calculated based on the growth earned in foreign currency, offering potential advantages during both weakening and strengthening of the rand.
8. Decision-making and Financial Advisers:
- Investors are reminded to make well-thought decisions, considering factors like exposure needs, asset allocation, and aligning with an investment manager's philosophy. The article suggests consulting an independent financial adviser for guidance in constructing a diversified and well-balanced investment portfolio.
In conclusion, the article advocates for a thoughtful and diversified approach to investing offshore, highlighting the benefits of leveraging offshore platforms for improved administration, lower minimum investments, and potential tax advantages.
