Offshore investing – maximising opportunity, minimising taxation


By Mark MacSymon


markSouth Africans can be excused for dismissing the idea of offshore investing.  After all – not only does the offshore investment universe offer a seemingly overwhelming amount of products, asset classes and service providers to choose from – but it also hasn’t come close to generating the kind of returns that we have seen at home over the last 15 years.

This is according to Mark MacSymon PCH Wealth Manager and a finalist in the 2015 Financial Planner of the Year Awards, who says that if you consider the first decade of the new millennium, the 10 years from 2000 to 2010 as an example – if you did take your Rands out of South Africa and invested offshore in a general equity tracker that tracks the performance of the MSCI World Equity Index you would have generated a total return of roughly 15% in USD – not per annum, but rather IN TOTAL. This compares to a ZAR return of 22% over the same period.

“In contrast, if you were invested locally, an investment simply tracking the movements of the JSE all-share index would have returned 430% in Rands and 395% in US dollars.”

But as we all know too well, the world of financial markets is a dynamic place, and for the period from 2010 to now, the situation has changed somewhat and, as MacSymon explains, while our local equity market has still produced some attractive performance numbers in Rands terms – gaining just over 120% since 2010 – the MSCI World Index has caught up having gained 89% over the same period.  But more importantly, unlike the period from 2000 to 2010 when the Rand hardly had a material effect on your returns – this time around it did! “If you were a South African investor invested in the MSCI World Equity Index your Rand return would have been 195% – comfortably beating the JSE and clearly illustrating the effect that currency can have on your investment returns.”

And, in a development which makes for an even stronger case for offshore investing,  Finance Minister Nhlanhla Nene increased the annual foreign investment allowance from R4 million to R10 million per calendar year for individuals in the February budget speech.

“Offshore investing offers a myriad of benefits, not least of which is potentially better investment opportunities, improved portfolio diversification and a hedge against Rand weakness,” says MacSymon.

“Offshore markets provide a much broader universe of shares, bonds and funds – for example the Saxo platform alone gives us access to over 19000 stocks listed in 19 countries across the globe – making the task of finding valuable and attractive investment opportunities so much easier.”

However an investor needs to consider what solutions are available. Whether to invest directly using a segregated portfolio or consider a multimanager unit trust portfolio or similar wrap vehicle. And each of these offers different restrictions and tax benefits.

MacSymon explains that the use of an offshore segregated portfolio using a combination of ETF’s (low cost, market / industry trackers) and offshore listed shares provides excellent access to attractive offshore opportunities. This allows SA investors to gain access to the world’s top global brands and corporate titans, as well to gain access to sectors and markets not well represented by the JSE such as biotechnolgy and technology stocks.

“Depending on the investors risk profile another good opportunity is the use of a multi-manager unit trust portfolio. By blending the investment styles of ‘best of breed’ asset managers with proven track records, a wealth manager can control the risk and return attributes of various portfolio solutions. Institutionally diversified portfolios spread asset manager risk so that portfolio returns are not driven by the style, strategy and philosophy of only one asset management house.”

It is not necessarily only the solution that an investor selects that is important. It is also deciding on which vehicle you pick to implement that solution.

MacSymon says that there are several effective offshore vehicles which Private Client Holdings can recommend to investors that are looking to invest offshore.  “International retirement and savings plans, also known as Retirement Annuity Trust Scheme’s, provide an effective vehicle for building long-term tax efficient wealth offshore. Retirement Annuity Trust schemes fall under Guernsey pension legislation and for Guernsey Income Tax purposes are exempt from income tax. In addition to the tax saving benefits, Retirement Annuity Trusts offer a flexible and cost-effective solution for building wealth offshore and are particularly useful for effective wealth transfer to future generations. The PCH Offshore Segregated Portfolio which invests in some of the world’s best global brands, can be positioned as the underlying investment solution within a Retirement Annuity Trust.”

“Alternatively, the use of a sinking fund or an endowment wrapper can ensure tax on interest and capital gains tax (CGT) is pegged at a level lower that what an investor might pay in their own marginal capacity. For instance, investors who pay tax at 41% for every additional Rand earned would prefer to pay 30% tax on interest. Similarly, CGT can be pegged at 9.99% using an endowment or sinking fund structure, which compares favourably relative to the maximum effective rate of 13.67% investors would pay if capital gains were to be taxed in their personal capacity. Sinking fund or endowment wrappers also have compelling estate planning benefits which should not be ignored.”

When it comes to accessing offshore investments MacSymon advises that investors wanting direct offshore exposure, given the plethora of international choice, should consider the offshore offerings of local fund managers that they have come to know and trust.