As offshore investment specialists for over 22 years, we at Overberg Asset Management have long been strong proponents of externalising funds to secure offshore investment opportunities. Why? Firstly, the ZAR is considered a depreciating currency, and holding an investment denominated in a hard currency such as USD or GBP assists to significantly protect the purchasing power of your wealth. Secondly, it enables access to a vast investment universe and therefore potentially significantly superior returns.
If you are an individual looking to invest in your personal capacity, then this is relatively easy to achieve by utilising your R1 million annual discretionary allowance or, with exchange control approval, your additional R10 million annual foreign investment allowance.
However, South African entities are not afforded such offshore investment allowances. Significant cash reserves may accrue within a company over time. So, if you are a shareholder of a local company and are looking to benefit by investing surplus cash into an investment portfolio with maximum offshore exposure, what are some of the options available to you?
- Declare a dividend to shareholder(s) if they are individuals.
The cash reserves or a portion thereof would be paid out to the shareholders, enabling them to externalise the funds offshore within the above-mentioned allowances. However, there is a 20% dividend tax on such a distribution to shareholders. While there are numerous offshore structures that provide tax-efficiencies for individuals, this would need to be weighed against the dividend tax payable.
Depending on the circumstances however, the above scenario may not be a feasible solution. The funds may need to be retained within the company and invested by the company. The following solutions can then be considered:
- Investing in a ZAR-denominated investment that provides indirect offshore exposure.
By investing in locally managed unit trusts with an offshore mandate or selected exchange traded funds (ETFs), the funds remain within the jurisdiction of SA, but benefit from the underlying offshore holdings contained within these investment instruments. All returns from the investment are paid in ZAR, so further gains could be realised from the forex effect as the ZAR depreciates further.
ETFs are listed baskets of securities that track the performance of various underlying indices. There are numerous locally traded ETFs that track the performance of offshore indices e.g. the S&P 500, Nasdaq 100 etc. As a result of their tracking nature, they are considered passive investments, which are cost-effective.
These investments may not be sufficiently diversified across geographies, sectors, and currencies; funds would not be restructured when more attractive opportunities arise, and it may be challenging to maintain a desired risk profile.
Such a scenario can be mitigated using an actively managed ETF portfolio. For example, the Overberg Asset Management actively managed Onshore Global ETF portfolio is consistently monitored to ensure it is well diversified to enhance value for investors. This portfolio delivered an annual return (after all costs) of 20.66% for 2023.
- Utilise an asset swop facility.
Certain authorised South African financial institutions are issued a capped offshore allowance by the South African Reserve Bank (SARB). This effectively acts as an “umbrella offshore allowance”, enabling clients of such an institution – and importantly, investment accounts held in the name of a company – to utilise a portion of the institutional allowance for their own purposes.
The client (company) would transfer funds in ZAR to the institution and the institution would in turn externalise the funds offshore which would be held in a foreign currency – this is the mechanism known as an asset swop facility. There is no limit to how much any one client can invest utilising this method, provided that the institution has not reached its authorised allowance cap. The relevant institution would charge a fee for facilitating the asset swop. Any proceeds from a withdrawal or liquidation of the investment are however, required to be remitted back to South Africa.
This strategy has a number of significant advantages. Unlike the indirect approach listed in 2) above, the investment is held offshore and denominated in foreign currency. As such, the full global investment universe is available, including potentially higher-growth instruments such as (amongst other investments) investment companies, small-cap holdings, and alternative investment classes, which would not be accessible via local unit trust or ETF holdings.
Additionally, there are offshore structures in which one’s investment can be housed. These can provide material tax-efficiencies, further accelerating the return on investment. As a licenced Category 2 financial services provider, Overberg Asset Management can facilitate the implementation of such specialist offshore structures.
How to make an informed decision.
Overberg Asset Management has developed a unique calculator that compares various investment options including:
- The company declaring a dividend and paying the dividend tax upfront, whereby the shareholder as an individual invests the funds; and
- The company retains the funds which are invested, and whereby the dividend is declared at the end of the investment period.
The calculator provides for the various tax efficient products, providing a comprehensive assessment of the many options. The earnings, costs, taxes, and totals are available in summary report.
It is always recommended to seek professional advice to ensure that your circumstances and objectives can be assessed, ensuring the most beneficial strategy for your unique requirements.
We pride ourselves in customised support, and we would like to invite you to reach out to our Wealth Managers, who will skilfully assist you in the assessment of your company’s options.
By Damian Johnson and Julie Anderson, Overberg Asset Management All writers’ opinions are their own and do not constitute investment recommendations or financial advice. Speaking to a qualified wealth and investment professional is crucial before making financial decisions.
- ‘Overberg Asset Management (Pty) Ltd. is an authorised financial services provider: 783’ established in 2001.
