By Grant Meintjes, Head of Securities, PSG Wealth.
It’s 10 years since the beginning of the global financial crisis, and investors are more aware than ever of how portfolio diversification can help protect their investments. These days, a diversified investment portfolio should include both local and international shares.
Our securities division offers clients the ability to trade a range of international instruments, including international stocks, real estate investment trusts (REITs), exchange traded funds (ETFs) and American depository receipts (ADRs) on one platform through our offshore partnership with Société Générale (SocGen).
How much money can I invest offshore?
South Africans have rushed to take cash offshore in the wake of political instability in the country in the last 18 months. Consequently, the question around how much can be taken offshore tends to pop up in dinner conversations.
In short, any natural person (who is a South African resident) whose tax affairs are in order can invest R10 million per year with the necessary tax clearance certificates and Reserve Bank permission. In addition, R1 million can be invested annually without any tax clearance certificates. Juristic entities can use PSG Wealth’s institutional (asset swap) allowance to invest offshore without requiring tax clearance certificates.
Any cash that has been declared previously and that is held in foreign currency can be invested in shares through our platform, with no need to repatriate the funds to South Africa first.
Offshore investment is not (primarily) a rand hedge decision
It might seem strange, but you should not see investing offshore as primarily as a rand hedge. Most large companies listed on the JSE derive their income from outside South Africa, thus providing the investor with some rand hedging already. It is therefore better to view offshore diversification as a long-term investment with capital appreciation in mind.
An investment strategy can help you avoid temptation
Having a clear investment strategy is just as important – if not more so – when diversifying offshore. This is especially true since there are so many potential distractions when investing offshore. There may be some great investment opportunities, but not all will be suited to your investment strategy.
An investment strategy starts with a clearly defined goal and action plan on how to achieve your goal with a reasonable probability of success. Companies have multiple listings internationally and investors should be confident that they are buying the correct listing. The same investment principles that apply to local share investing should be followed when investing offshore, namely:
- investing quality time researching the companies or sectors to invest in
- having a clear investment objective, and defining your trading horizon.
A focused portfolio can deliver better results
You should be careful not to invest in too many shares, thus complicating your decision-making and diluting your portfolio by inadvertently taking on more exposure to certain sectors than intended. Try and limit your portfolio to between 10 and 15 shares. Your portfolio construction should be based on your specific risk model and can include REITs, stocks, cash and ETFs. Your portfolio construction needs to take the complexities of the markets and the political environment into account and enable you to still achieve your investment goals.
Share selection remains important
Select shares that have a high level of safety and low chances of a permanent loss of capital.
The time horizon of the investment will determine whether you select shares with high earnings or high capital growth prospects.
Asset selection diversification will be a key driver in achieving your investment objectives.
Diversification across geographic locations is crucial, as countries don’t necessarily experience growth in sync.
Understand the CGT treatment of your investment
When investing offshore, you should take note that there are two different CGT calculation methods. It is important to understand which one will apply to your portfolio.
Calculation method 1
Investors who use their individual offshore allowance and individuals and trusts that use PSG Wealth’s asset swap facility share the same calculation method. CGT is calculated by first determining the profit or loss in the base currency of the security transacted and then converting the profit or loss to South African rand at the end-of-day spot rate.
Calculation method 2
Investors using the asset swap facility or investing in the name of a company or investment club will use the second CGT calculation method. This method will calculate the rand value of the purchase and the rand value of the sale on the date of the transaction and reflect the profit or loss in South African rand.
Plan your offshore investment carefully for the best results
Investing offshore is a valuable diversification exercise and can offer astute investors important growth opportunities that are not available locally. As with any share investment, you need to plan before you take the leap and ensure you have a sound investment strategy in place to help ensure a successful outcome.