How to invest in funds offshore
Investing in hard currency has become much easier.
CAPE TOWN – For years, South Africans have been used to the idea of exchange controls. Since the 1960s, they have been something we have learnt to live with.
However this year’s national budget really put an end to them as far as individuals are concerned. When Treasury announced that the annual allowance for individuals would more than double from R4 million to R10 million and that an additional R1 million discretionary allowance per year could be used for any legal purpose abroad, it effectively ended controls for all but the most wealthy South Africans.
Having lived for so long under a regime of restrictions, however, most South Africans remain unaware of how easy it is to move money overseas. And for investors looking for exposure to foreign markets, this is a very important consideration.
When looking for international exposure South Africans really have two options: They can invest through rand-denominated funds where their holdings will always be quoted in rands and will have to be paid out locally in rands. Or they can take the funds offshore, invest in hard currency, and have the option of having any payouts made into an international bank account.
The benefits of the latter are that you are dealing with the issues of currency and market risk more directly. Some people prefer to know that the money is actually held outside of South Africa as a buffer against local risk factors.
How, then, do you actually do this?
The first step in using your offshore allowance is to understand what is involved. South Africans can take a total of R11 million per person a year offshore, and the first R1 million of that is discretionary. That means that you only have to notify the South African Revenue Service (Sars) that you are using this allowance, which you do by completing a form at your bank.
Anything more than the first R1 million does however need tax clearance, which must be obtained from Sars. The Revenue Service will check that your tax affairs are in order and issue you a clearance if they are satisfied.
In theory, this is limited to a further R10 million per year, but Andor Gradwell, a wealth manager at Sanlam Private Wealth, says that in practice individuals have been able to get approval to take out much more.
“As long as you are declaring the money, Sars may even entertain requests to externalise amounts over R10 million if your tax affairs are in order,” he says. “They will do an enhanced check, but to all intents and purposes there is limited exchange control these days.”
Once that clearance is obtained, investors have three ways to make international investments.
The first, and perhaps the easiest, is through a local company that runs an offshore investment platform. To invest through one of these, all you really need to obtain is the application form and their offshore bank account details.
“South African-based companies like Sanlam Private Wealth, Glacier by Sanlam and Allan Gray will give the client an international account to pay into,” Gradwell explains. “The client instructs their bank to make the transfer, and once the money is received it will be invested as per the application form.”
These platforms do offer a good range of options across fund managers, currencies and asset classes. There are 50 different funds in five different currencies on offer through Allan Gray, for instance, and 90 in three different currencies on the Glacier platform.
Any withdrawals from these kinds of investments can either be paid back into South Africa, or into an international bank account.
A variation on this is to use an online broker like Standard Bank Webtrader. This gives you greater flexibility as you can invest in a range of securities like shares, forex, contracts for difference (CFDs) and exchange-traded funds. However, there isn’t an option to use this account to invest in international mutual funds (unit trusts).
Just as with the offshore platform options, opening a Webtrader account requires you to deposit funds into an international bank account. That is then used to fund your trading activity.
If, however, you want the greatest flexibility in your offshore investments, then it is worth opening your own offshore bank account. Again, this is not very difficult to do, given the number of international banks with a presence in South Africa.
“It’s really easy to open offshore bank accounts now,” Gradwell explains. “Most big banks like Barclays or HSBC will visit you at your house and open a bank account for you, usually in the Channel Islands. They will require you to put in a minimum deposit within a few months, but you don’t need millions. The minimums are around £500.”
Once you have your own international bank account, the world becomes open to you.
“Most countries don’t have exchange controls, so you can use that money to invest in just about any stock exchange or buy mutual funds or exchange-traded funds anywhere in the world,” Gradwell says. “Having your own bank account gives you great flexibility.”
In most cases you will still have to engage a broker to facilitate the investments on your behalf or work through investment platforms. However you are free to do your own research and make your own decisions about which service providers to use.