Given that we live in South Africa and therefore spend in rand rather than dollars, pounds or any other currency, for many of us it may make sense to have a significant portion of our wealth in rand. However, when spreading our eggs between various baskets, investing in different currencies is an important way to de-risk our wealth.
Core wealth is the money that is required to support a lifestyle without having to work. In other words, your core wealth enables you to be financially independent. Any more than that is considered surplus wealth. Wealth managers will suggest that anything from 40% to 65% of your core wealth should be invested outside of South Africa. Even more of your surplus wealth should probably be offshore.
One way to invest offshore is to use your offshore allowances. Everyone can take R1 million out of the country per year as a Discretionary Offshore Allowance, without tax clearance. Remember that if you travel overseas and spend money there, give money to children or grandchildren overseas, or buy things from overseas, then this expenditure will use up a part of your R1 million annual Discretionary Offshore Allowance.
You may also take a further R10 million per year out by using your Offshore Investment Allowance, for which you will need tax clearance. This can be done every year and there is no lifetime limit, so over ten years you could invest R110 million offshore as an individual or R220 million as a couple.
Money externalised in this way never has to be repatriated. It can be invested offshore or kept in a bank account for use when travelling. One day your children could inherit this offshore money and leave it there as well.
Another way to take money offshore is to invest in a local company that uses a rand-in-rand-out principle. What this means is that you invest rand into the portfolio, the money is then invested offshore via the company’s offshore facility and when you draw money out it is brought back into SA and paid out to you in rand.
Life insurance companies and unit trust management companies provide you with this facility. They are allowed to invest 40% of the money that they manage for clients offshore. In other words you can acquire offshore exposure by investing in products that these companies provide through their offshore allowances.
Another option is to invest via stockbroking firms which will have different offshore capabilities and will charge different fees for you to use their offshore capabilities. Note that all of these examples apply to discretionary money and not retirement money. Retirement funds are only allowed to invest a maximum of 30% offshore.
An offshore strategy is an important part of wealth management. Right now, for instance, South African asset managers agree almost unanimously that it makes sense to tilt their equity portfolios more towards offshore than local. So if you were to look at your retirement fund or your unit trust portfolios right now, chances are you will see that you are overweight offshore equities and underweight South African equities. In February’s budget speech the offshore limits were increased by 5% across the board. At the time you were likely to find that life insurance and unit trust companies had maxed out their previous offshore limit of 35% of the money they manage overseas, and retirement funds had also maxed out at their limit of 25% offshore.
When you look at the underlying investments that make up your portfolio, there will be varying amounts of offshore exposure within them.
For example, let’s say that Mbulelo has a retirement fund worth R1,5 million. He also has a tax free savings account worth R60,000 and some unit trusts worth R440,000 bringing his total portfolio to R2 million. The retirement fund and tax free savings each have 30% offshore and his unit trust has 40% offshore, giving him an overall offshore exposure of 32% or R644,000 of his total portfolio. If he had invested in an offshore equity unit trust fund which was 100% offshore, then his overall offshore exposure would be 45%, or R908,000 of his R2 million portfolio. An optimum allocation should be worked out for Mbulelo in order to calculate what is best for him.
So too should you consider the aggregate level of your offshore exposure and establish what the optimum level is for you. When managing your wealth it is important to look at the overall portfolio asset allocation and not just at the allocation of individual funds within your portfolio.