Updated: Nov 24, 2020
Do not put all your eggs in one basket. Miguel de Cervantes Saavedra, a Spanish novelist, coined the popular proverb in 1605 in Part I of Don Quixote. His version: “It is the part of a wise man to keep himself to-day for to-morrow, and not to venture all his eggs in one basket”.
This principle is equally true today in South Africa. We face the added complexity of, in addition to our local uncertainties and financial risks, the reality of risks associated with globalisation as South Africa is now very much part of the globe.
Notwithstanding any negative or positive views that you may or may not have regarding South Africa’s future, it will be prudent to always apply the above principle to your hard-earned money and savings, not only in the South African context, but also from a global perspective. A well-balanced portfolio in South Africa, without any offshore investments in a foreign currency, will be vulnerable to volatility and deteriorating value of the South African Rand “ZAR”. To have a portion of your investment in foreign currency will provide a natural hedge against the weakening of the South African Rand, whist also providing growth and income in foreign currency.
It is important to determine your individual goals and to invest according to your unique circumstances. Get ideas and investment advise from a reputable and fully regulated financial planning company.
The following is a high-level list of potential types of offshore investments: https://www.cisi.org/cisiweb2/cisi-website/about-us
Foreign Currency Accounts – SA Banks
SA Residents may open Foreign Currency Accounts “FCA” in South Africa in any of the major hard currencies of the World, and simply purchase currency for placement in their own Foreign Currency Account, from where funds are freely transferable anywhere in the world.
These accounts provide the mechanism to invest ZAR in Foreign Currency at any given time. Foreign currency can then be moved to any investment vehicle at a later stage, and in good time. These accounts provide a great mechanism to create a natural hedge against the background of a deteriorating Rand. Due to the current low interest rates being experienced globally, these accounts are not bearing any interest at the moment.
Cash Deposits and Money Markets – Offshore Banks
Cash deposits generally comprise accounts with banks or other savings institutions, all of which are targeted at retail investors, even though companies and financial institutions make short-term cash deposits with banks. The main characteristics of cash deposits are:
The return simply comprises interest income, with no potential for capital growth except interest. This is very relevant in the generally low interest rate cycle currently being experienced globally.
The amount invested is repaid in full at the end of the investment term.
The money markets are the wholesale or institutional markets for cash, and are characterised by the issue, trading, and redemption of short-dated negotiable securities, usually with a maturity of up to one year, though typically three months. It must be noted that whilst a safe investment option, this type of investments offers low returns, given the low interest cycle that we are currently experiencing in the world.
Insurance investment products
This is the umbrella term for all the stocks, bonds, options, derivatives, and other financial instruments that people put money into, in hopes of earning profits. The types of investment products available for individual and institutional investors can differ significantly but the “profit” motive stands behind all of them. A wide range of investment products exist within the investment universe to help investors meet short-term and long-term investment goals. Overall, investors purchase investment products for their capital appreciation potential and income paying distributions. Capital appreciation and income distribution are both relevant to investment products.
Some investment products are purchased by an investor primarily for their potential to increase or appreciate, over time given specified growth factors. Other investment products may have an additional income paying component. Fixed income investments such as bonds and commingled bond funds, offer investors the opportunity to purchase an asset that may increase in value while also paying out fixed interest payments or capital distributions. Other income paying investment products include dividend-paying equities, real estate investment trusts and master limited partnerships. Modern portfolio theory, suggests that an investor have a diversified portfolio of investments including a variety of investment products, to obtain an optimal risk-return reward for their investments. https://www.investopedia.com/terms/i/investment-product.asp
Insurance/Financial planning companies, play a large role in determining clients’ needs and risk appetite and whilst all the above can be done independently, it is advisable to involve a specialist company in this regard.
A bond is a debt security – in other words, a security that represents a loan made to a third party. When an investor buys a bond when it is first issued, they are lending money to a government, a corporation or other entity, known as the issuer. In return, the issuer promises to pay a specified rate of interest during the life of the bond and to repay the principal on a specified maturity date. Governments issue bonds to borrow money to cover their net cash requirements, i.e., to meet the gap between the amount received in taxes and the amount required for government spending.
As an asset class, property can provide positive real long-term returns allied to low volatility and a reliable stream of income. The advantages are:
absolute returns, especially against inflation
relatively low correlation with bonds and equities (supplying diversification).
Property as an asset class is unique in its distinguishing features:
Each individual property is unique in terms of location, structure, and design.
Valuation is subjective, as property is not traded in a centralised marketplace, and continuous and reliable price data is not available.
An investment manager needs to consider whether exposure to the residential or commercial sector is appropriate for the portfolio they are managing. It is therefore important to understand the differences between the two. There are several ways in which individuals can invest in property including:
building a portfolio of directly owned properties
investing in listed property companies or real estate investment trusts (REITs)
investing in property unit trusts and similar vehicles.
It is important for investors to understand the various types of equity and equity-related investments including types of share – ordinary, common, preference, and other. Investors should also understand the implications regarding in vesting in non-listed equity vs listed equities. As in South Africa, these equities are subject to market forces, and should be subject be approached with caution. It is possible that a downward move in the value of any particular equity issued be compounded by an adverse move in the value of the ZAR thereby creating cause for concern.
A derivative is a financial instrument that is derived from something else. A derivative is, therefore, a financial instrument whose price is based on the price of an underlying asset. This underlying asset could be a financial asset or commodity – examples include bonds, shares, stock market indices and interest rates; for commodities they include oil, silver, or wheat. Futures and options are commonly used derivative instruments. Derivatives are used for both hedging, speculation and to get exposure to markets in a cheaper way, especially if a market security is illiquid. Derivatives can be used as part of a risk management technique, but over recent decades they have been used to speculate and make profits. However, a lot of companies have used them solely to speculate outside of their business remit and have made spectacular losses.
Commodities offer diversification opportunities because of their low correlation with traditional asset classes (equities and bonds); commodities can play an important diversification role within a portfolio. Within the broader commodities asset class, there is scope for further diversification. Top-level categories include food, energy, precious metals and non-precious metals. Also, many subcategories are in competition with one another or have different demand and supply drivers. For example, in the energy sector, the gas market and the oil market are currently driven by very different dynamics. Investors should focus on supply as well as demand conditions for commodities. Geopolitics remains a fundamental driver of commodity prices. As we have seen in the past, political tensions in the Middle East can easily lead to a sharp increase in oil prices. It is vital for investors to understand the main features of commodity markets, and how the physical characteristics, supply
and demand, and storage and transportation issues influence prices: agricultural; metals; energy.
Exchange control rules and limits regarding Offshore investments
The South African Reserve Bank allows South African residents to invest abroad under the following 2 categories:
1. Single discretionary allowance
A single discretionary allowance is limited to a R 1 million per calendar year and is available to all RSA residents who are 18 years and older, and in possession of a valid green bar coded South African identity document or smart identity document card.
This dispensation may be used for any legitimate purpose (including for investment purposes abroad as well as the sending of gift parcels in lieu of cash excluding gold and jewellery) at the discretion of the individual without any documentary evidence having to be produced to the Authorised Dealer (SA Bank). There is also no requirement to obtain a TCS PIN letter from SARS prior to making transfers under the Single Discretionary Allowance limit (SDA). Transfers of a capital nature undertaken via the SDA, typically for investment purposes, must be transferred in foreign currency and may be made in addition to the Foreign Capital Allowance referred to below.
2. Foreign capital allowance
A foreign capital allowance may be made available through an Authorised Dealer, which can be transferred to a foreign currency account held with an Authorised Dealer (Bank) in South Africa or invested abroad, within a limit of R 10 million per calendar year per individual taxpayer, who is in possession of a green bar coded South African identity document or Smart identity document card and is 18 years and older. Furthermore, and in terms of the SARS Tax Compliance Status System, a tax compliance status PIN letter will also need to be obtained and issued to the taxpayer. This will, inter alia, contain the individual’s tax number and a relevant PIN. Authorised dealers (Banks) will need to use this PIN to verify the taxpayer’s tax compliance before effecting transfers in terms of the Foreign Capital Allowance. Individuals who do not have a tax reference number will be required to initially register with SARS, before transfers can be considered.
It is noted that Individuals can participate in offshore share incentive or share option schemes, or -
take up new shares in foreign companies that have accrued by way of rights on existing holdings of shares provided that transfers in payment thereof are dealt with in terms of the R 10 million foreign capital allowance and/or the R 1 million single discretionary allowance. Requests falling outside of these dispensations must be the subject of an application to SA Reserve Bank, Financial Surveillance Department. Participation in such share incentive schemes which will not have an impact on the local foreign currency reserves, i.e. no transfer of foreign currency, would normally not present a problem, but the Bank will invariably wish to review the scheme rules, to enable them to come to a suitable decision. Any amounts to be invested offshore by individuals, in excess of R 10 million will require the submission of a formal application to S A Reserve Bank for approval and will depend on the individual applicant’s financial position and will be dealt with on its own merits.
It must be noted that Individuals can invest without restriction (in ZAR) into locally managed investment products that have foreign exposures, via a local Institutional Investor, such as collective investment schemes and long-term insurers.
Foreign Exchange rates and fees
Private individuals are not always getting the service, advice, and solutions from service providers regarding foreign exchange transaction. Traditionally clients will be tiered regarding their pricing, advice, and service. As foreign exchange and exchange control are complex especially from an offshore investment perspective, it is an imperative to get the correct advice and guidance upfront.
These types of transactions are also sometime subject to exorbitant exchange rates and fees as uninformed clients are often exploited.
Given the current state of global markets, weakening and volatile ZAR/Currency exchange rates, investing offshore can be quite challenging. It is therefor imperative that you choose the correct partners on this new journey.