Diversified investment portfolios and offshore exposure

Worldwide stock market performance over the past few years has reminded everyone of the importance of diversification. Investors with a fully diversified portfolio had greater protection against market falls and may even have seen positive returns.

With globalisation becoming an increasingly significant factor in both investment markets and our daily lives, investing internationally is a vital element of a successful portfolio. By taking advantage of investment opportunities outside South Africa, you can share in the growth of the world’s most important and profitable companies. You may also benefit from holding investments in currencies other than the rand.

The most basic form of diversification is to spread your money across different types of investment, such as cash, bonds and shares. Within each of these types you can then achieve an even greater level of diversification. For example, with bonds and shares you can invest in different types of companies that will respond well to different market conditions. This is where international investing has a role to play. Markets around the world offer different levels of growth potential – with corresponding levels of risk – and produce their highest returns at different points in the economic cycle.

Keeping all your investments in South Africa may seem like a cautious strategy, but a large exposure to any single currency can have a negative effect on the performance of your portfolio. This is especially true when the currency is as volatile as the rand.


Factors to consider when investing offshore

In the current economic climate, the question investors should consider is not ‘Why offshore?’ but ‘How?’

Investors also need to consider the various ownership options best suited for their needs. Ownership options include holding your investments in your personal name, joint names, multiple names, offshore trusts, offshore companies, offshore trusts combined with an offshore company, or offshore tax wrappers. The universal key to understanding these different international ownership options is the careful consideration of the estate and tax planning considerations relevant to your particular needs and circumstances – there is no one-size-fits-all.

Because South Africa has a residence-based system of taxation and potential situs taxes, it is essential to ensure an appropriate mix between the chosen international ownership option and investment solution. It is particularly important to consider all associated costs (including the tax costs), and to conduct a cost-to-benefit analysis when selecting the appropriate mix.


Consult a professional financial advisor

A professional advisor is essential for long-term financial success. Working with someone you trust, who has expertise and knowledge you can rely on, will help you make the right financial choices. If you consult your financial advisor before making any investment decisions, they will make sure your financial planning considers your current position and future goals and isn’t simply a reaction to short-term market movements.

 

Gold is an area that is getting attention as a safe-haven asset

 

A financial advisor can help you:

  • Define your goals and devise a strategy to achieve them.
  • Determine the impact of investment decisions on your long-term objectives.
  • Check you have the right combination of investments for your financial goals.
  • Understand the tax implications of changes to your portfolio.
  • Choose investment products from the wide range available.
  • Stay informed about new opportunities.


How should you invest across developed and emerging markets in the current global economic context?

We think global emerging markets are among the cheapest and most attractive regions in the world. Sure, they have their issues (some more than others), but they also offer the best long-term growth prospects, the lowest valuations and the added bonus of cheap currencies.

Regionally, it’s hard to ignore Asia, with mighty China at its centre, but for us the most important decision is to be exposed to emerging markets rather than trying to pick which region might do best. Right now, however, the specialist managers we most respect are generally favouring Asia.


What alternative asset classes will deliver the best returns for offshore investors as the pandemic continues?

Our international investment team prefer to focus on alternatives wrapped in stock-market- listed investment trusts, and right now one of the points they keep making is that there are some quality assets trading on absurd discounts. One area they’ve highlighted is that of UK commercial property, where there are some really good quality portfolios trading on 50%-type discounts to their appraised values.

That’s not to say that commercial-property funds don’t have challenges. The pandemic has accelerated some trends, such as the moves to online shopping and remote work from home. A hard Brexit and a weak UK economy are also hardly providing a helpful background. So, there is some pressure on values, but we think it is quite absurd to suggest that a diversified portfolio of prime assets will halve in value, as implied by these prices.

Gold is an area that is getting attention as a safe-haven asset. Traditionally it goes up when the dollar is weakening, but it’s also a good hedge against inflation – and the opportunity cost of holding gold right now is close to zero, given today’s interest rates. So, we can see a case for gold as part of a diversified portfolio, but where we struggle is in valuing gold. That’s like trying to answer the question ‘How long is a piece of string?’

 

Endowments offer an attractive tax-efficient option

 

Our team is happy to get involved in infrastructure, too. Typically, this area offers high and reliable cash flow with some linkage to inflation. Since our team believes that ultimately the only way the world can exit its debt problems is by deflating it away, then any type of asset that pays you a good cash flow and offers the added bonus of an inflation hedge is interesting to us. So, we’re quite involved in renewable-energy infrastructure, general infrastructure and healthcare infrastructure – especially care homes for the elderly.


How else should investors maximise offshore exposure due to regulation 28 limits on retirement savings?

Most investors hold their retirement savings either through a company-sponsored retirement fund or an individual retirement annuity. They are regulated under regulation 28 of the Pension Funds Act, which allows for 30% offshore exposure and 10% in Africa. Rand hedge shares offer additional exposure via the local equity component of investment portfolios within retirement funds.

Voluntary saving allows for direct offshore exposure via annual allowance into foreign currency or indirect offshore exposure via asset swap, better known as onshore-offshore investments.


Tax-free accounts

You can use a tax-free savings account as a platform to international investment via local investment products using asset swaps. A tax-free investment is a highly cost-effective way to save and gain exposure to international investments. It’s a great way to make every rand count and to maximise the growth on your savings, while giving you the peace of mind that you can access your money if you need to.

Some benefits of a tax-free account:

  • You don’t pay tax on any of the investment proceeds: income, interest, capital growth or dividends.
  • All income generated can be reinvested into the tax-free investment without incurring any tax liabilities.
  • The only fee is the annual management fee – there are no upfront, switching or exit fees.

Remember, though, that you can invest a maximum of R36,000 per year and a total of R500,000 over your lifetime in tax-free savings.


Endowments

Endowments offer an attractive tax-efficient option for people who want to save more than the maximum annual limit for tax-free savings accounts, and those who have exhausted their annual tax allowances, such as tax-free interest income.

The recent increase in the capital gains tax (CGT) inclusion rate means:

  • an 18% effective tax rate on capital gains for individuals in the highest income tax bracket, and 36% for trusts.
  • for an endowment policy, the effective CGT rate for these individuals and trusts is just 12%.

In addition, tax on income is 30% for endowments as opposed to 45% when you are taxed according to your marginal tax rates in other investment vehicles. This tax treatment is also beneficial for other income categories, such as those with a marginal tax rate above 30%.

 

Nedbank Private Wealth has an integrated international investment and banking platform called Focus

 

For the investor who wants additional international exposure, an endowment offers attractive benefits:

  • It gives you a place to invest the foreign currency you have.
  • It maximises tax-efficient growth potential depending on your personal tax rate.
  • Compound growth can give your investments a boost over time.
  • If you take money out, there is no additional tax payable after we’ve paid SARS.
  • You get estate planning benefits if you nominate beneficiaries.


Foreign currency accounts

This is a local investment account denominated in foreign currency, offering interest rates linked to the London Interbank Offered Rate (LIBOR) on a daily balance and allowing withdrawals and additional deposits.

A foreign currency account (FCA) allows clients to invest up to R11 million per year in major foreign currencies such as the US dollar, British pound sterling, euro, Japanese yen, Australian dollar, Canadian dollar, Hong Kong dollar or Israeli shekel.

The South African Reserve Bank allows South Africans to invest in foreign currency as follows:

  • A total of R1 million per year without having to obtain a tax clearance certificate under the single discretionary allowance.
  • Up to an additional R10 million per year, provided that a tax clearance certificate is obtained from SARS.

The advantages of an FCA for investors are that it diversifies an investment portfolio by having an account in a foreign currency, it offers a hedge position against currency fluctuations without having to move funds offshore, and investors can transfer funds in a foreign currency to an account held at an overseas bank.

For investors seeking to externalise the foreign alliance, Nedbank Private Wealth (NPW) has an integrated international investment and banking platform called Focus. It offers a wide range of investment markets and geographies using NPW-managed solutions, global trading and related investment services.

In addition, investors benefit from lending and leverage facilities, and structuring experts assisting with the optimal structure through trusts, companies or tax-efficient offshore wrappers. An added benefit is a current account in US dollar, euro or pound – and you can choose more currencies from a total of 15. The service is offered from our regional offices across South Africa, backed up by our international client services team, offering investors expertise from both a local and an international perspective.