Offshore investing strategies for South Africans: diversify your portfolio

For many South Africans, offshore investing is a strategic move—one that provides access to global markets, reduces reliance on the local economy, and protects against currency volatility. While some investors pursue offshore exposure to meet specific future liabilities, others seek broader diversification across industries and jurisdictions that are not available locally. Whether driven by rational planning or a desire to mitigate domestic risks, investing offshore can be an essential component of a well-structured portfolio.

A primary reason to consider offshore investing is diversification, keeping in mind that South Africa currently accounts for less than 1% of global GDP. As such, a portfolio fully concentrated in local markets is subject to significant country-specific risk. By investing offshore, one gains access to a broader universe of global industries, more stable economies, and a better geographic spread of risk.

Investors can effectively choose to invest directly offshore by physically transferring funds out of the South African jurisdiction or to invest indirectly through a Rand-denominated fund. While direct offshore investment means investing in a platform listed abroad and investing the funds in foreign currency, indirect offshore investing allows one to invest through a local investment platform on an asset swap basis. Note, however, that there are a number of local service providers who have simplified the direct offshore investment process, so it’s important to do your research and select a provider who can implement an efficient solution. 

If you intend to invest directly offshore, you will be limited to your Single Discretionary Allowance (SDA) and your Foreign Investment Allowance (FIA). The SDA is limited to R1 million per calendar year and may be used at the investor’s discretion without the need for a tax clearance certificate or other supporting documents. The Foreign Investment Allowance enables investors to transfer a further R10 million offshore over and above the SDA, but will require that the investor obtains a tax clearance certificate from SARS, which is valid for 12 months. Worth noting is that an investor does not need to use the SDA and FIA sequentially. In other words, the FIA can be applied for and used without any of an investor’s SDA being accessed, bearing in mind that the SDA is very useful when it comes to travel, covering emigration costs, making international purchases, or moving smaller amounts of money offshore when exchange rates are favourable.

Where an investor is likely to incur their expenses in foreign currency, it may make sense for that investor to build an offshore portfolio in the jurisdiction in which they intend to live and spend. Primarily, this would involve hedging against a volatile currency exchange. Where an investor is contemplating retirement abroad, a future emigration, or has children who are likely to study abroad, setting up an offshore portfolio in that region would make sound investment sense.

There are several reputable service providers and asset manager platforms that provide for the exchange and transfer of funds to offshore jurisdictions. Due to their specialist nature, these companies are able to offer more preferential rates on exchange as well as other value-added services, such as enabling the application for tax clearance, which is included in their pricing. Importantly, investors should give careful consideration to the most appropriate structure for a direct offshore investment, which may include direct shares, discretionary unit trust funds, or endowment wrappers. 

Investing indirectly offshore means that an investor would effectively invest in a local unit trust portfolio that has a mandate to invest in foreign assets. The local unit trust management company will convert the investment into foreign currency through an asset swap using their foreign exchange capacity, keeping in mind that local fund managers can hold a maximum of 45% of their retail assets under management in foreign assets. As this type of investment is made using the investment platform's asset swap capacity, the investor does not need to make use of their SDA or FIA, and no tax clearance certificate is required. 

There are a number of available global feeder funds offered by various local asset managers who are able to invest funds abroad on an asset swap basis in various markets determined by each fund’s particular investment mandate. As the investor is making use of the asset manager’s capacity to externalise funds, these investments can be implemented and allocated with relative ease. These feeder funds allow investors to build offshore exposure into their portfolios while also providing an exchange hedge against a depreciating Rand. Because an indirect offshore investment does not form part of the investor's FIA or SDA, there are no limits in terms of how much can be invested. 

If you are invested directly in foreign shares, you will likely need a foreign will to deal with those assets. Generally speaking, if you are invested indirectly offshore, your South African will should be sufficient to deal with those assets. That said, it is always important to establish upfront whether the investment administration platform recognises your local will for probate purposes or whether a foreign will in that jurisdiction is required.

* Odendaal is an associate financial planner at Crue Invest.

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