Offshore investments in South Africa: how do they actually work? 17 August 2015
You can obtain exposure to overseas investment markets in two ways, namely, via asset swap funds and via direct offshore investments.
With an asset swap, an investor buys a rand-denominated unit trust through a South African financial institution. The unit trust company then uses its asset swap capability to invest the funds offshore. The investment returns are repatriated and paid out in rands.
Asset swaps are ideal for investors who do not need to physically move their funds offshore but would still like to profit from investing in overseas markets.
Asset swaps tend to have lower investment minimums and are less onerous in terms of regulation and paperwork. They also allow monthly contributions rather than one-off investments and the Reserve Bank’s foreign investment allowance does not apply to them. The investor does not need to decide on the currency in which they wish to invest as the collective investment scheme company does this on their behalf.
With a direct offshore investment, an investor buys into collective investment schemes (such as unit trusts) through a foreign financial institution. The foreign institution then invests the money directly in foreign assets and the returns are payable in foreign currency and do not require repatriation to South Africa.
Direct offshore investments are suited to investors who want their investments outside the jurisdiction of the SA Reserve Bank.
Direct offshore investments have higher investment minimums. The investor must decide on the investment jurisdiction and fund currency, the investment must be authorised by the South African Reserve Bank, and the investor’s foreign investment allowance applies to the funds.
What’s the bottom line?
Like all financial decisions, offshore investments need to be tailored to your individual needs. To find the right fit you must evaluate different scenarios in terms of your investment goals. Contact your financial planner to explore what suits your personal situation.