How to hedge against volatility with overseas investments – Julian Adshade from Sable International

Amid the mounting political uncertainty in the lead-up to the 2024 elections, coupled with the persistent volatility of the rand and unsettling discussions on the term ‘failed state,’ South African investors are increasingly turning their gaze towards foreign shores in pursuit of financial security. Julian Adshade from Sable International says that the depreciation of the rand stands out as the primary impetus driving South Africans to contemplate offshore investments. The Rand, he said, has depreciated 6.5% per annum against the dollar since 1994. Furthermore, the looming political risks associated with the upcoming elections and the notion of securing assets abroad for the benefit of future generations contribute to the growing discourse on safeguarding funds by investing them overseas. During this interview with BizNews, Julian Adshade delves into the advantages of offshore investments for South Africans, explores the various investment vehicles worth considering, and provides insights into the potential tax implications of overseas investments.

Listen here

Excerpts from the interview

Rand depreciation spurs South Africans to seek overseas investments

There are four key reasons why South Africans should look to move money offshore. The first is to get diversification outside of South Africa. The second is hedging against rand depreciation, the third is political and economic risk mitigation, and lastly, generational wealth transfer, which is becoming quite prevalent these days.

The first point that any client approaching us speaks to is investing in hard currency, moving away from the rand. If we look at just the rand on its own, it’s depreciated at 6.5% annually against the dollar since 1994. The Rand is a very volatile currency. You can see daily swings of about 3% in either direction against the dollar. A lot of these short-term movements are caused by sentiment, and that’s the emotional side of investing. But if you look at the long term, about 6.5% against the dollar annually over the last 30 years. So, a big factor is hedging against the rand. It’s always been a factor on South African cards and will continue to be going forward.

Read more: Australia opens doors to 400,000 migrants, creating best opportunity in a decade – Sam Hopwood Sable International

Political risk is on everybody’s minds

I think South Africans have a global mindset. We want to move our money out of the political landscape of South Africa and into developed markets where there’s more political stability and hopefully more certain outcomes when it comes to investment returns. That’s one of the factors that South Africans always look to – political stability. Everyone has their views on the future of South Africa, but political risk is definitely on everyone’s minds. What’s going to happen in 2024 with the election coming up? Many of our clients speak to the uncertainty of the political situation in South Africa. So, moving money out of South Africa and giving clients some stability is definitely on their minds now.

Generational wealth transfer is becoming more important to South Africans

I’m sure many of us have family around the world, siblings, and children, and when we’ve built up assets in South Africa, and we want to pass it on, especially retired clients that have got significant assets and they have built it up in South Africa over time. If they want to pass it on to their children, let’s use an example of clients with children in the UK. If they want to pass on a reasonable amount of wealth to their children, they generally are going to have to start externalising and thinking and planning now because if the rand weakens against the pound at probably about 7% a year, then what would it be worth in ten, 15, 20 years to their children? So, that’s where one has to consider what we are spending in our lifetime and what we want to pass on to our kids. That’s where we need to think about the portion of assets offshore in hard currency that won’t be subject to this rand depreciation.

Read more: Insights into the popular UK visas for saffers – John Dunn Sable International

Moving money outside of South Africa does not absolve you from tax

From a tax point of view, South Africans are taxed on their worldwide income. So, moving money outside of South Africa does not absolve you from tax reporting and paying taxes in South Africa. I think that’s one thing that many clients tend to misconceive. You will continue to pay tax whether the money sits in South Africa, the Isle of Man, Guernsey, Jersey, or any of these international jurisdictions; tax will always be payable. The amount of tax may differ depending on the structure you use, but if you’re a tax resident of South Africa and you are an ordinary resident, the tax will continue to be payable by you, no matter where the assets are located.

Three main investment vehicles to consider

There are three main investment vehicles that one can consider when investing offshore. For a very simple approach, it would be a feeder fund, so a feeder fund is a rand-denominated offshore portfolio. This gives you access to international markets, but the portfolio is in rand. So whenever one looks at the return on the portfolio, the rand will play in that. So, for example, if the rand weakens, the portfolio value will increase. As the rand strengthens, the portfolio value will decrease. Direct offshore funds would be you approaching either an offshore platform or an offshore unit trust provider. This is where you physically send your money out of South Africa to an offshore investment manager, and that would be denominated in foreign currency, and your returns are in hard currency. The rand has no play on your return, but the tax position between those two vehicles, the feeder fund and the direct offshore, differs.

Whenever we look at tax, we generally want to look at capital gains tax. So, that’s a tax on the growth within an investment. With the feeder fund, you get taxed on the currency devaluation. You pay capital gains tax on the currency devaluation, whereas with a direct fund, you don’t pay tax on the currency devaluation. To give you a simple example, let’s say we invest R100. Let’s just say in five years; we’re invested in a feeder fund, now worth R400, and the capital gain.