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Offshore Investments
Sunday, June 1, 2008
No option but….

Diversification is unquestionably one of the most important investment principles for reducing risk. For South African investors, there are several compelling reasons to achieve this by investing at least some of one’s assets offshore, not the least of which are to reduce political and currency risk. The South African economy and markets represent less than 1% of global totals.
Comments Mohini Naidoo, Investment Analyst, Nedgroup Investments, “It stands to reason that limiting all of your financial exposure to this one relatively small component of world markets leads to a high concentration of risk, which serves the opposite purpose of diversification. In addition, developed markets typically display a lower level of volatility than small emerging markets such as South Africa, as well as providing investors with opportunities to invest in companies, industries and instruments that are not available domestically.”
Naidoo says the decision to invest offshore should be made in the context of your entire investment portfolio, and should be a strategic or long-term consideration, not based on short-term market events. Attempts to time markets are often spectacularly unsuccessful and may have dire long-term consequences on your wealth accumulation.
“Having made the decision to diversify globally an investor should give careful consideration to what portion of their portfolio they wish to invest offshore, what investment vehicles are available, and what the associated costs and tax implications are,” he says.
For South African investors, two main entry points exist. The first, and simplest from an administrative viewpoint, is through a rand-denominated unit trust investing in foreign assets. This effectively provides investors with exposure to foreign markets without having to physically take their money offshore. The value of the investment will be determined by movements of the underlying assets in the foreign market, and currency fluctuations.
The fund manager will use his investment company’s offshore allowance to invest in foreign markets, either directly, or by securing the expertise of a foreign-based manager. A distinct advantage of this approach is that individuals do not have to apply to the South African Reserve Bank (SARB) for foreign exchange, or seek approval from the South African Revenue Service (SARS) to take funds offshore. Investors will also enjoy the protection of such a fund falling under the local regulatory umbrella of the Financial Services Board.
Naidoo says the second option is to invest in foreign currency. This approach is subject to local exchange control regulations. South Africans are currently entitled to apply to SARB to invest up to R2 million in foreign investments. An investor wishing to exercise this option is also required to obtain a tax clearance certificate from SARS. Local currency is converted to foreign currency, and the investor then has complete flexibility of choice with regard to what investment vehicle to use. While the investor may now have the benefit of a much larger investment universe to choose from, it necessitates a more vigilant approach to investing and investors are cautioned to do their homework beforehand. “Using a reputable, FSB-registered asset manager for offshore investments relieves much of the administrative burden and reduces potential administrative risks (lack of disclosure, embezzlement and fraud), often associated with investing in foreign markets.”
In both instances, be sure to understand the tax implications and costs before investing as these could impact significantly on your end return.

Copyright © Insurance Times and Investments® Vol:21.5 1st June, 2008
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