How much is enough to hold offshore?

Old Mutual International South Africa on offshore investing

Wayne Sorour, Head: Old Mutual International South Africa

Representing less than 1% of the global economy and expecting less than 2% growth in GDP per annum over the next two years, the South African economy appears unlikely to offer local investors the chance of decent returns, which remain hindered by socio-political and economic factors. 

To mitigate the risk of over-concentrating assets domestically and increase their potential for greater and diversified returns, high net worth investors are increasingly taking advantage of their R11 million allowance to invest outside of South Africa.

The universe of offshore investing is exponentially more complex and vast than that of investing locally– and it’s easy in uncertain times to panic. Hence, it is always important that investors consult with their financial advisers when considering investing offshore. And even before considering investing offshore, financial advisers needs to take into account investors’ finances, holistically. Questions will arise, such as: Are they still carrying debt? Do they have existing onshore investments that will cater for their needs locally? What percentage of their investment portfolio do they want offshore?

Once these questions have been answered and some discretionary money remains, offshore becomes an appealing option.

Diversification

While the diversification of assets remains the main strategic reason for offshore investment, Wayne Sorour, Head: Old Mutual International South Africa says that, from a South African perspective, investors are investing in more stable economies for better returns and a wider choice of investment options plus as a currency hedge.

“For instance, if you wanted to invest in the Pharmaceutical Sector on the FTSE/JSE, your options are limited to three companies, Aspen, Ascendis and Adcock Ingram. However, within global markets you have a selection of over 60 pharmaceutical companies, and that’s just on the London Stock Exchange. Your investment universe increases exponentially, on top of which you can hedge against the volatility of the rand.

“First world equities are also attractively priced relative to bonds and cash. As a result of the low interest rates, investors can currently receive better returns from equities than government bonds and money in the bank.”

Studying abroad

Given the uncertainty surrounding many of the universities in South Africa, Sorour says that increasingly, high-net-worth individuals are opting to fund future study plans for their children by investing offshore. “At the moment, a big concern for many is whether a degree obtained from a South African university will carry the same international recognition going forward as it has in the past. Parents are therefore increasingly opting to make provision for their children to study abroad if they wish to do so.”

When looking to make an offshore investment, Sorour says that investors essentially have two options to consider. “They can invest directly, or via a rand-denominated offshore fund, or what we would call an asset swap fund. Investing directly offshore may seem like the simplest method, however, this option requires tax clearance and various other forms of approval, making it a slightly more onerous process. However, if the investor chooses this option, their investment proceeds will be available to them offshore, in a currency and jurisdiction chosen by them.

“For investors seeking more favourable returns due to current market conditions with a rand hedge, an asset swap should be considered, whereby returns are based on the movements of another currency, but paid out in the base currency (i.e. rand). However, due to the ease of process, the costs are often higher and the taxing method is less favourable when purchasing an asset swap.”

Tax implications

Sorour urges investors eager to explore their offshore options to consider more than just returns. In addition, he says that the various investment structures available also need to be considered, as well as tax implications and estate planning consequences. All of these factors can impact the ultimate success of an investment. For example if an investor, with offshore assets were to pass away, there may be consequences of not having an offshore will. This is where an adviser can add a great amount of value in determining what vehicle would be best for each specific client, based on their financial position and requirements.

Thus investors need to think about the structure in which they invest such as directly in funds such as a unit trust, or via a life wrapper. Sorour adds that they need to consider the tax implications of this decision in terms of the markets and jurisdictions into which they are investing. Investors also need to take into account the impact on local tax.

There are some structures that are more tax beneficial than others. Furthermore, estate-planning issues need to be taken into account as there can be very serious implications on offshore investment inheritance taxes. Regulations in the USA and UK dictate that non-residents are taxed on some assets they have and this can be as high as 40%. For example, when people buy property in the UK, if its value is in excess of £325,000, it will incur inheritance tax of 40%.

Ultimately, Sorour says that there is no “best” route or pre-defined portion of wealth that should be invested offshore, as this is dependent on the individual’s specific financial situation and goals.

“Overall wealth, financial goals and family setup are just some of the factors that impact what percentage assets should be invested offshore. An experienced financial adviser will be fully equipped to assess these factors and suggest a solution that is most suited to a particular situation.”

IMPORTANT INFORMATION: Old Mutual Wealth (“OMW”) is an elite service offering brought to you by several licenced Financial Services Providers in the Old Mutual Group (“the Old Mutual Group”). This article is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any information contained herein. OMW, the Old Mutual Group and its directors, officers and employees shall not be responsible and disclaim all liability for any loss, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be suffered as a result of, or which may be attributable, directly or indirectly, to the use of, or reliance upon any information contained in this article.

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