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Everything You Need to Know About Offshore Investing

Considering investing offshore but not sure where to start? The prospect of investing money abroad can be daunting, especially if you are new to investing. But, if done properly, investing offshore can be a highly lucrative long-term investment opportunity.

Previously, investing offshore was often only available to high-net worth individuals, and was a complex, lengthy and expensive process. However, in recent years, it has become far more accessible to South African investors. Exchange controls and limits on offshore allowances have steadily relaxed and new products and platforms have been brought to the market.

Today, investing offshore is critical for South African investors seeking a balanced yet diversified financial portfolio. Especially considering South Africa only represents less than 1% of the world’s economy. Limiting your investments to the local market, therefore, means you are missing out on significant opportunities to grow your wealth abroad.

ELA Asset Management CEO, Faadil Moti says global diversification of your investment portfolio is especially important in today’s uncertain post-COVID environment. He cautions that before you start out on your investment journey, it is important for you to identify your investment goals and determine your appetite for risk. You also need to understand the investment options available, as well as the benefits and drawbacks associated with offshore investment.  Faadil says there is no “one size fits all” approach when it comes to the split between local and offshore investments. Rather, investors need to carefully assess the available options and choose the one that best suits their needs.

ELA Asset Management has highlighted the ins and outs of offshore investing for South African investors:

Ways to Invest Offshore

There are two ways in which a South African can invest offshore:

  • Direct Investment – This form of investment is suitable for investors who are comfortable leaving assets offshore for the long-term. Direct investment involves directly moving cash offshore. Exchange control regulations allow South Africans aged 18 or over to move R1 million out of South Africa each year as part of their Discretionary Allowance. For any amount over R1 million, you need to apply to the Reserve Bank for a Foreign Capital Allowance. The Annual Individual Foreign Investment allowance is capped at R10 million per calendar year. This excludes the R1 million single discretionary allowance. Therefore, you can invest R11 million offshore per year.
  • Indirect Investment– This form of investment gives you access to international markets, but your money does not actually leave South Africa. For Indirect Investment, you are not restricted by how much you can invest (it does not count as part of your personal R11 million offshore allowance). Products such as unit trusts, exchange-traded funds, retirement and saving plans, crowdfunding and share portfolios can all be used when investing offshore, depending on the investors’ unique needs. ELA Asset Management has backed property crowdfunding startup, Crowdprop, which has opened the doors to international property investing.

The Benefits

  • Investing offshore allows you to spread your investment risk across different economies and regions.
  • It enables access to different industries, interest rates and stronger economies.
  • As an emerging market currency, the rand has a history of volatility which is why investing offshore can help to preserve your wealth if it weakens.
  • It offers an effective way to save tax by enabling investment in low tax jurisdictions.
  • Offshore investing offers a hedge for people concerned about South Africa’s political/economic landscape.

The Drawbacks

  • Developed economies often have far lower interest rates, meaning your investment may grow at a slower pace than a local investment.
  • Offshore investment involves a longer time frame because of the added volatility of international currencies and markets.
  • A significant amount of funds are required for Direct Offshore Investment.
  • There are a range of unforeseen costs that investors often do not factor in before taking their assets offshore, including transaction fees and tax. Therefore, if you are not working with a knowledgeable service provider, you could find yourself shelling out considerably higher amounts than you anticipated.

The Bottom Line

Investing offshore is no longer a ‘nice-to-have’, but rather an important consideration for all South African investors. Especially when one considers the South African stock market represents less than 1% of the world economy. With uncertainty characterising both local and global markets, investments should only be made with a well-thought-out strategy. This is why professional advice is so crucial to making the right decision for your long-term wealth.

“Confidently navigate the world of offshore investing by partnering with the right financial service provider. It is also important to arm yourself with all the necessary information and take the time to plan and prepare. By doing so, there is no question you will reap the rewards associated with offshore investment,” concludes Faadil.

Find out more about ELA Asset Management’s Individual FX Services.