By Anna Mabote (Portfolio Management Support at Galileo Asset Managers)

Contrary to popular belief, investing in offshore markets is not exclusively reserved for the wealthy. Today’s world of economic globalization and interconnectedness has made it possible for anyone to invest in offshore markets and optimize the returns on their investment portfolio. Considering that South Africa only makes up 1% of the world economy and that companies listed on the JSE generate more than 60% of their revenue from foreign markets, it is evident that restricting your investments to South Africa alone creates a geographic concentration risk. Let’s unpack why you should consider offshore exposure in your investment journey and explore different ways to access offshore markets. Lastly, we will highlight the benefits and disadvantages of investing offshore.

Reasons To Invest Offshore

Diversifying Risk in your portfolio: Diversifying your portfolio across various geographies and beyond local borders enables you to counteract local headwinds such as political, social, and economic risks with international growth. Furthermore, it allows you to reduce the impact of currency depreciation by diversifying your currency risk, thus preserving your purchasing power and ultimately diversifying your overall portfolio risk.

Growing & Protecting Your Wealth: Investing in offshore markets gives you access to invest in a wider range of companies, industries, and sectors that are not available locally. Industries such as technology, automotive, healthcare, and biotechnology can grow your capital and produce greater returns due to their extensive reach in global markets, thus giving your investments greater depth and breadth.

Different Ways to Invest Offshore

As a South African investor, one can access offshore markets in numerous ways.

Direct Offshore Investment: Each person is allowed to transfer R1 million in Single Discretionary Allowances (SDA) offshore each year, which does not require the authorities to issue a tax clearance. Additionally, you have an annual R10 million Foreign Investment Allowance (FIA) that you may send offshore; however, you must obtain a tax clearance from the authorities before transferring the funds. So, direct offshore investing can be done through transferring funds offshore by converting your rands into the desired foreign hard currency (dollars, pounds, euros, swiss franc, etc.) with an offshore bank or broker and investing directly in an offshore domiciled fund or buying foreign assets. Any dividends and investment growth accrued will be received in foreign currency.

Indirect Offshore Investment: Another approach to accessing offshore markets is to invest in a Rand-based fund that offers exposure to global assets. These are known as feeder funds (asset swaps) in which you invest your rands in a ZAR-based fund, and the fund manager will implement the necessary asset swap admin and buy into the offshore fund. With Rand-based feeder funds, your dividends and investment growth will be accrued in rands.

Lastly, you can invest in South African unit trusts that have a high allocation to offshore, especially if you’re investing for retirement. The offshore allocation for retirement products has increased from 30% to 45% for Regulation 28 compliant funds. This allows local investors to enhance their retirement savings and seek better investment opportunities in foreign markets.

Benefits of Investing Offshore:

• Investing in offshore markets offers you a wide variety of listed stocks, funds, and ETFs from which one can choose to invest, thus optimally managing risk in your portfolio.
• Minimum deposits for Rand-based feeder funds are relatively low and, therefore, easily accessible to invest in.
• Offshore markets have the potential to yield greater returns, provide capital growth, and help create, grow, and preserve wealth.

Disadvantages of Investing Offshore:

• Making direct offshore investments can be a lengthy process, especially when one has to wait for tax clearances from the authorities.
• In estate late cases, offshore investments may be subject to the Probate process, which prescribes procedures for administering all of the deceased’s offshore assets according to the laws of the jurisdiction in which they are located.

In conclusion, investing in offshore markets can elevate your overall investment returns, offer a risk management cushion, and grow your capital in the long term. Structuring an offshore investment plan is more complicated than structuring a local one. So, to help you structure an offshore investment strategy that will provide higher returns and is specifically suited to your investment goals and objectives, you must speak with an experienced financial advisor. This is to ensure that your investment horizon, risk tolerance, goals, and objectives are considered since they will all play a significant role in determining how much offshore exposure you should have.