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FINANCE

Off-shore Investments: Do I need it?

When it comes to investments there is never really a single, magical solution, even with off-shore investments.


July 1, 2003

No single investment option can ever provide you with the complete solution to your financial needs. This rule applies equally to investing off-shore. However, every successful investment plan consists out of a combination of different strategies. In this context, off-shore investment should form a component part of the good investors' investment plan.

There are a number of reasons for investing directly offshore, including:

To reduce risk - By exposing your money to different countries, currencies and companies (as opposed to keeping it all in South Africa) the investment risk is reduced substantially.

For longer-term stability - As the major foreign markets are all in first world countries, the liquidity of the markets are of such a nature that short term volatility is recouped relatively quickly. In addition, the rest of the world offers investment opportunities which may not be available in South Africa. Different economies perform well at different times and the wider choice of investment vehicles gives the investment manager more opportunities for outperformance.

To reduce currency risk - In the long term the rand should depreciate by at least the inflation differential between South Africa and its major international trading partners and we expect that to happen.

To remove the political risk - Recent events in Zimbabwe illustrated the importance of political risk in the investment cycle. By investing in offshore world markets this political risk is substantially reduced - if not removed.

Potential of higher returns - Industries and companies not available in South Africa with higher return potential than in the local market are accessed. Examples are biotechnology and TMT areas of expertise.

Lower volatility - As investments are made in more stable first world markets, their volatility is invariably lower than those in the local market. The Reserve Bank has laid down a number of requirements for an individual wanting to remit funds out of the country:

Individuals must be 18 years or older; A form 1423 (application to purchase foreign currency) must be completed in duplicate and submitted to Exchange control at the Reserve Bank; A tax clearance certificate from the Receiver of Revenue must accompany the request to confirm that the taxpayer has no outstanding tax commitments; A maximum amount of R750 000 per taxpayer may be remitted; Trusts, close corporations and companies are not allowed to remit funds directly.

What are the options?

There are two ways for a South African investor to get international exposure in his investment portfolio:

1. Direct offshore investment - He may remit the funds offshore for investment.
2. Indirect offshore investment - He may invest locally in so-called asset swap products offered by local institutions, including policy portfolios and unit trusts. Points to take into consideration when investing directly offshore.

It is of vital importance that the contact and service point to your overseas investment is in South Africa.

There are over 32 000 funds overseas making it very difficult to select the best funds for your needs. A "fund of funds" with an international spread of assets will make your choice much easier and reduce your investment risk since the manager of the international "fund of funds" will make the following decisions for you:

-the best exposure to different fund managers
-the best exposure to different markets
-the optimum exposure to different currencies
-the ideal exposure to different asset classes
-the exposure you should get to different sectors, or specialist themes.

You should invest in offshore funds with the following characteristics:

Financial Services Board approved

  • Locally serviced and local contact point
  • Tax effective from SA investor's perspective
  • Cost reasonable (preferably there should be no exit charges)
  • The on-going costs should be reasonable.

    As with every other investment option, it is very important to integrate off-shore investments into your overall financial planning strategy. In this regard, it is often best to speak to a competent financial advisor from a reputable firm. –QFN

    For a free personal assessment of your financial risk profile, your retirement plan or a general portfolio assessment, email us.
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