Offshore 101: Understanding the basics

In today’s interconnected world, people see themselves as global citizens, and investment opportunities are no longer limited by borders.

The twenty-first century has brought unprecedented access to international markets, enabling investors to diversify their portfolios globally and have access to some of the largest companies worldwide. As they position themselves and their portfolios for long-term wealth creation, South Africans have increasingly incorporated offshore investments into their portfolios. This trend has gained momentum over the years, reflecting evolving investment needs and goals.

Defining investment goals in a global context

Every investment journey should begin with a clear understanding of your needs and goals. These could include preserving wealth, generating a steady income stream or maximising long-term capital growth. In a globalised environment, aligning these objectives with the right mix of local and offshore assets is crucial to achieving your targeted outcomes.

Investors seeking diversification often look beyond the South African stock market, exploring global investment opportunities in a wider variety of geographic regions, asset classes and sectors. These include global technology, healthcare innovation, renewable energy and consumer brands with a strong international presence. The key to investing offshore successfully is to align allocations with your advice plan, risk tolerance and time horizon, while also considering factors like currency movements, inflationary pressures and country-specific economic shocks – all of which can impact portfolio performance.

The global market landscape and offshore equities

Today, global markets are both dynamic and interdependent. Developments in one region – such as interest rate decisions or geopolitical tensions – can have knock-on effects across the global landscape. This interconnectedness means that opportunities and risks must be carefully assessed when investing offshore.

Offshore exposure plays a pivotal role in diversifying portfolios. While the Johannesburg Stock Exchange offers investors the ability to invest in about 400 local and global companies, offshore equities provide access to a much broader universe of listed companies that dominate their sectors internationally. These companies often have multiple geographical revenue streams, which highlights the attractiveness of including offshore assets in a portfolio.

Offshore investing isn’t just for the wealthy: Accessing offshore exposure through feeder funds

One of the most accessible ways for South African investors to gain offshore exposure is through feeder funds. These are rand-denominated unit trust funds that invest directly in an offshore fund. This structure removes the need for investors to open offshore accounts or make use of their foreign investment allowance.

The advantage of feeder funds lies in their simplicity:

• Ease of access: Investors can invest in rands without worrying about exchange control processes or currency transfers.
• Professional management: The underlying offshore fund is managed by experienced global investment teams.
• Diversification: Investors gain access to international markets across sectors, geographies and asset classes.

Feeder funds provide an excellent solution to both investors who are new to offshore investing and those who prefer a straightforward entry point.

Offshore investing options

Investors can use either their single discretionary allowance of R1 million, which does not require tax clearance, or their foreign investment allowance of R10 million per year, which requires both tax clearance and exchange control approval. A variety of products support South African investors seeking to invest directly offshore. For straightforward investing, offshore discretionary investments are available, while more sophisticated estate planning, tax efficiency and long-term wealth accumulation needs can be addressed using investment wrappers such as endowments and sinking funds. These wrappers can be advantageous for investing offshore and intergenerational wealth planning, which have become increasingly important considerations for South African families.

The case for exposure to offshore markets

While local opportunities remain valuable, by clearly defining investment goals, understanding global market dynamics and using accessible structures such as feeder funds, offshore share portfolios, endowments and sinking funds, South African investors can strategically invest in global markets and harness its benefits.