Offshore investing is a crucial element of diversification in an investment portfolio – but for many investors, finding the right international investment, or figuring out how to go about investing internationally seems complicated and daunting.
The truth is, once you know a few simple things about international investing, you will be able to easily take the first step.
Here is what you need to know:
1. Investing internationally does not mean you are unpatriotic
Just because you are considering moving some of your money into an international investment, does not mean that you are one step away from emigrating or that you have written off any hope for the future of South Africa, so don’t let those kinds of conversations influence you. Instead, by investing a portion of your money internationally, you are diversifying your risks and gaining exposure to a world of investment opportunities that you would not have if you only invested in South Africa.
2. Investing internationally is about diversification
Think about it – the South African stocks make up 1% of the global equity market capitalisation, so why would you limit your investment opportunities to such a small segment of the market? A quick review of the past few years and the major market events that have occurred around the world will also show how uncertain and volatile markets around the world have been, which brings with it potential for investment losses as well as investment opportunities.
However, no one can accurately predict where in the world the best returns are going to come from in future – so it makes sense to diversify your investments as much as possible. This includes diversification across countries, currencies, companies, market cycles, and types of investments.
By broadening your investment horizons, you also open the door to investing in high quality companies that you cannot access in South Africa. You also get the benefit of the investment expertise of international fund managers who are global experts in their fields.
3. There are different ways to invest internationally
Depending on the amount of money that you want to invest internationally and the kind of exposure to international markets or currencies that you are looking for, there will be different options for you in terms of investment. These are:
• Invest in a rand-denominated feeder fund:
A rand-denominated feeder fund is an indirect way of investing internationally. The fund is a South African fund but with a mandate to invest internationally. You therefore invest in Rands. The fund invests in international companies on your behalf and your returns are converted back into Rands and paid to you in your local bank account.
The minimum investment amounts for feeder funds are generally lower which makes this a more accessible option for many investors. You still get access to international investments, but you are not subject to exchange controls or estate planning issues and you can even use a tax-free investment to invest in.
• Invest directly in an international fund
When you invest in a direct international fund, you convert your Rands into a foreign currency and make a deposit into a foreign bank account in order to invest in a fund that is registered (domiciled) in an international country. The advantage of this is that once you have taken your money out of South Africa, you can keep it in a foreign currency and have the option of any international investment products and fund managers.
South Africans who are in good standing with SARS can invest invest a maximum of R10 million offshore per calendar year, provided a Tax Clearance certificate is obtained from SARS. In addition, individuals are granted an annual discretionary offshore allowance of R1 million per calendar year, where a Tax Clearance certificate is not required.
It’s important to note that the investment minimums for direct offshore funds are higher which can be a barrier for some investors. You will also be subjects to exchange control, tax and estate duty so you should talk to your financial planner to help you consider this.
Take the first step
Once you have considered these points relative to your situation, you are on your way to investing internationally. For more information about how to make international investments work for you, talk to your financial planner or visit www.nedgroupinvestments.com.