Many people are interested in investing internationally but are often unsure and fearful of where to start.
To unpack international investing we can apply Simon Sinek’s golden circle and start at the centre which is the ‘why’. There are different reasons why people want to invest internationally, and it is important to know what your reasons are, as these will determine which type of international investment will be right for you. From there we will move on to the ‘what’ where we will unpack what the investment options are and then lastly close off with the ‘how’, showing you how you can practically start investing internationally.
Why exactly do you want to invest internationally?
Before we talk about why people invest internationally, let’s start with what international investments are. There are shares listed on the Johannesburg Stock Exchange which are considered South African shares, but what is quite interesting is that if you look at the 40 biggest companies thee is that more than 60% of their earnings actually come from international sources. So, despite the fact that they are listed in South Africa, they have a fair amount of international earnings and some of the examples of these are Steinhoff, Naspers and Richemont.
But for this conversation, we would like to focus on international shares and other investments that you would purchase outside of South Africa. So, you would take your rands and convert it to the relevant currency and purchase for example, Facebook, Apple and Alibaba.
Reason 1 – Diversification
If you had to draw a map and had to represent each country by the size of their economy, you would see South Africa is less than half a percent of the global economy. So that is a really, really small basket to fit all your eggs into and many people have this idea that they do not want to be so concentrated in such a small country and want to spread those investments across multiple countries.
Reason 2 – Rand depreciation
Another reason, is that people are concerned about the long term and whether the rand is going to depreciate and potentially limit their future options.
Reason 3 – Access out of South Africa
While a little bit more vague, some people have this notion that their money may be safer out of South Africa in terms of political risk. There are also other reasons why people want access to money outside of South Africa, such as paying foreign university fees for their children or people that are considering emigrating to join their children.
These are the 3 main reasons amongst a whole host of others, but it is important to give it some thought so that you are clear on what your most important reason is.
Ways to access international investments
There are 2 main options when it comes to international investments. Option 1 is international investments accessed in SA in Rands and option 2 is international investments accessed outside of SA in a foreign currency.
The first option provides you with access to international investments in Rands in South Africa. This is a simple way to access international investments and means not going through the trouble of going to the bank to get forex done or being subjected to high minimums. Effectively you are using the offshore limits of your chosen platform manager who will take care of that aspect of things for you.
Option 2 is taking your Rands, converting them to another currency like dollars or yens or pounds and then buying an international investment that is outside of South Africa.
And when it comes to diversification of your portfolio, if that is your main reason, both of these options will tick that box. In terms of currency depreciation, both will give you protection. The reason that you are getting that protection with option 1 is because although you are putting the money in and taking it out in Rands, you are still invested in a foreign currency and you will get growth on that money if the rand depreciates.
The main difference in these options is how you access the money. With the first option you cannot access the money outside of South Africa and if your main reason is the ability to do that, then this may not be the option for you. Of course, you can opt to do a combination of both option 1 and 2.
There are two variations with option 1. You can choose to invest in a fund that only has a portion invested internationally, but the more relevant variation is a feeder fund, which is effectively fully invested offshore.
Other considerations
Then comes the question of simplicity. With a feeder fund, accessibility from SA it means low minimums, the ability to set up debit orders and you do not have to worry about forex. Whereas an international fund can be a little more complex, where you cannot set up a debit order or monthly withdrawal because of the limitations and requirements of the Reserve Bank, and the minimums are a bit higher. However, do not let that put you off as we have a team that can help you every step of the way.
Another consideration is the differences in tax. For example, when you withdraw money from your feeder fund, capital gains tax will be applied on the growth in the foreign currency and if the rand has depreciated, you will also pay CGT. However, in an international fund you will only pay capital gains tax on the growth in the foreign currency.
So how do I go about doing this?
3 things to decide before investing internationally:
– Decide how you want to access your money
-Do you want your offshore exposure in Rands or foreign currency
-Decide in which currency you want to invest
– Decide on the fund(s) you want to invest in, there are a multitude of funds available, so we may have to sit down and discuss your needs and establish a risk profile
– Make sure your tax affairs are in order if you plan to take more than R1m outside of SA in a calendar year to invest in an international fund as you will need to apply to the South African Reserve Bank approval if over R1m.
For guidance and advice, contact us.
– 011 476 1016
– fred@innov8fs.co.za