A road trip to financial freedom

Three easy ways to invest offshore

By Lizelle Steyn

Published 29 August 2023

french cafe scene

Photo credit: Lizelle Steyn

I’m not a cheerleader for taking all your money offshore – unless you’re about to emigrate – but every South African investor should have at least some of his/her portfolio offshore. Why? Our stock market makes up less than 1% of all companies listed globally. That means you’re missing out on more than 99% of the world if you keep your investments local. But, more importantly, so much of what we buy in South Africa is imported or priced in dollar – fuel, electronic equipment, car parts, digital subscriptions, coffee, chocolate, to name a few. Our portfolios need some exposure to dollars in case the rand weakens and our dollar-priced purchases become unaffordable when converted into rand prices. That’s the much touted rand hedge aspect of an offshore portfolio. It helps us to keep up with a strong dollar.

And it’s become so much easier to invest offshore than 10 years ago. More relaxed exchange controls and the development of accessible fintech played their part to create a few easy ways to invest offshore.

1 Buy a local ETF that invests offshore

A share trading platform like Easy Equities allows you to open a ZAR (rand) account or tax-free savings account (TFSA) with any amount – you can invest even only R1. Online, inside your ZAR and TFSA account (also called "wallet"), you'll see that local ETF providers, like Satrix, 1invest and Sygnia, offer offshore ETFs on the Easy Equities platform. If “MSCI” is included in the ETF name, chances are it has offshore exposure. It's important to do your own research to figure out which offshore index you want to track. The MSCI World, for example, gives you wide exposure to stock markets in developed countries.

Choosing a local ETF that invests offshore is the easiest possible way to get offshore exposure and they offer the added benefit that you can include them in your tax-free savings account. There are two cons, though. One day, when you want to withdraw the money, it can only be paid into your SA bank account. And if you don’t use a tax-free savings account to invest offshore (just a normal ZAR account with Easy Equities) you’ll be taxed on the weakening of the rand too, and not just the capital gains of the shares in the ETF. If you do use the TFSA account, don’t worry, then these taxes don’t apply.

2 Buy a foreign ETF

If, like me, you want your money to be “properly” offshore and be able to have your withdrawals paid into any offshore bank account you may have at that stage, then you can’t use a local fund that invests offshore on your behalf. You need to invest directly into an offshore fund yourself – either into a foreign ETF or a foreign unit trust fund.

This used to be an admin pain, involving queues at SARS to get tax clearance and then queuing again at your SA bank’s forex counter to get the money into your offshore bank account, from which you would transfer it to the account of the offshore fund manager. For amounts under R1 million, that’s largely something of the past now.

Nowadays, to buy a foreign ETF on the Easy Equities USD platform, for example, involves the following steps (no queues):

  1. Open both a ZAR and a USD account with Easy Equities
  2. Transfer money from your bank account into the EE ZAR account
  3. Transfer money from the EE ZAR account to the EE USD account selecting the EasyFX menu item
  4. Once inside your USD account, choose an offshore ETF from a reputable index tracking company like Vanguard or iShares by BlackRock

All of this can happen on the same day. And you’re offshore – a world citizen, at least in terms of your portfolio.

3 Buy a foreign unit trust fund

Most of my own offshore exposure is not in ETFs, though, but in offshore unit trusts, also known as mutual funds in certain countries. That’s purely because I had to work with what was available at the time when I started my offshore investments (2008). Then, only the more expensive actively managed funds were available, but even after fees, my chosen funds performed fairly well and I never switched out of them. Fast forward 15 years, and it’s now easier to invest in a foreign unit trust than before. The minimum amount to open an offshore account with Allan Gray used to be R100 000; it’s been dropped to R50 000. You no longer need an offshore bank account to invest on Allan Gray’s offshore platform, but other unit trust platforms might still have this requirement. If you don’t go with Allan Gray, check whether you would need your own offshore bank account. The Allan Gay offshore platform has also been offering some low-cost index-tracking unit trust funds for several years now.

Choosing the offshore platform of a local company like Allan Gray to administrate your offshore investment has many benefits , like ease of tax administration, easier estate planning and lower tax implications.

Comparison between local rand ETF that invests offshore and foreign ETF or unit trust

Local rand ETF that invests offshore Foreign ETF or unit trust
Will you use your annual R1m discretionary allowance? No Yes
Do you need tax clearance from SARS? No Only when investing more than R1m per tax year
Do you need to convert rand to foreign currency? No Yes
Do you need an offshore bank account? No Depends on platform. Not necessary with Easy Equities or Allan Gray
Can withdrawal be paid into offshore bank account? No Yes
Can you invest via your tax-free account? Yes No
Will you be taxed on rand weakening? Yes – unless it’s a tax-free account No
Will you be taxed on capital gains? Yes – unless it’s a tax-free account Yes
Source: gofreedom.co.za | August 2023

Having a passport and the means to travel anywhere in the world is liberating and for many part of the definition of personal freedom. Likewise, having a portfolio that can go anywhere in the world is part and parcel of financial freedom.