13 July 2022
By Colin Archibald, Regional Manager at Glacier International
Offshore investing has been in the spotlight again recently, though diversifying your portfolio across regions, currencies and industries has always been a sound strategy. Maintaining your spending power as the rand depreciates is another good reason to keep a portion of your portfolio in foreign currency.
Broadly, there are two options investors can choose from when investing offshore.
One is to take funds directly offshore using either the annual foreign investment allowance of up to R10 million (which requires tax clearance), or using the single discretionary allowance of up to R1 million.
The second is to invest in ZAR, which are then ‘swapped’ into foreign currency – known as an asset swap. Investors can access asset swap investments privately or via South African feeder funds.
Feeder funds vs. direct funds: what’s the difference?
Feeder fund
A feeder fund is a South African unit trust fund that feeds into a direct offshore fund. The investment is made in ZAR, which the investment company then converts into foreign currency, using their asset swap capacity.
It’s a less complex way to invest offshore, as no SARS clearance is needed on the part of the individual. The investment minimums required are also generally lower than those for a direct offshore investment, making feeder funds more accessible to a broader market. Ultimately, they provide a way for investors to gain offshore exposure in their local portfolios, and they can be used in general savings investments, such as an investment plan, and in retirement income portfolios.
Direct fund
A direct fund requires SARS clearance for amounts over R1 million, and generally a higher investment amount is needed. However, as discussed here, the direct fund can be more efficient from both a tax (assuming a weakening ZAR) and cost point of view.
Let’s compare
In the graph below, we’ve used the Satrix MSCI World Equity Index Feeder Fund in South African rand (ZAR) (light blue line) as a proxy for an international investment in global markets. This feeds into the Satrix World Equity Tracker (red line), which reports in US dollars (USD). They’re tracking the same index, with one reporting in ZAR and the other in USD.
Looking at the returns since inception – at an initial glance – we see that the feeder fund appears to have outperformed the USD fund. But remember: the graph is in the base currency. In Table 2 below we convert the USD back to ZAR to get a clearer view of the performance.
Graph 1
Returns since inception shown in base currency
In Table 1 below, to give us a more accurate comparison, we’ve converted the amount in the USD fund (direct fund) at the end of the period ($196 742) back to ZAR on that date, which gives us an ending capital value of R3 094 752 – using an exchange rate of R15.73 to the USD on that date. This compares favourably with an ending value of R3 005 600 from the feeder fund investment.
Table 1
Feeder fund vs. direct offshore fund since inception: 22 October 2013 to 31 May 2022
| Satrix World Equity Feeder Fund B2 | 22/10/2013 to 31/05/2022 | Satrix World Equity Tracker C USD |
| R1 000 000 | FX R9.73 (22/10/2013) | $102 775 |
| 200.56% | Return | 91.43% |
| R2 005 600 | Gain | $93 967 |
| R3 005 600 | Gross End Value | $196 742 |
| FX R15.73 (31/05/2022) | R3 094 752 |
Costs matter
The return from the direct fund is higher in ZAR terms as a result of it having a lower fund total expense ratio (TER) than the feeder fund. Although the above cost difference may seem small, on a compounded basis, this saving could have a material impact over time. Investment platform costs were not taken into consideration in this example.
- Satrix World Equity Index Feeder Fund A1 to 31 May 2022 – 200.56%
- Satrix World Equity Tracker C USD to 31 May 2022 – 91.43%
We’ve seen that costs can make a difference – but what about tax?
Tax considerations
The investor in the direct fund would have converted ZAR to USD in 2013 (investment commencement date) and would then only have paid capital gains tax (CGT) on the USD gains. When investing directly, currency movements over the investment period are not taken into account for tax purposes. In the case of a feeder fund, currency gains are included for CGT purposes.
In Table 2 below, the feeder fund has a gain of R2 005 600 against the direct fund’s gain of $93 967. CGT will be at the effective rate applicable to the investor, but we’ve used 18% (the maximum) in our example.
The CGT payable is R266 058 on the direct fund ($16 914 CGT multiplied by the R15.73 exchange rate on the day), versus R361 008 on the feeder fund, which is R94 950 more in tax alone.
This shows that the direct fund is more favourable when it comes to CGT (assuming a weakening currency over time) and cost.
Table 2
CGT comparison
| 30 June 2020 | 1. Feeder fund | 2. Direct fund |
| Gross end value | R3 005 600 | $196 742 |
| Gain | R2 005 600 | $93 967 |
| CGT (max 18%) | R361 008 | $16 914 |
| X R15.73 (31/05/2022) | R266 058 | |
| Net end value USD | $179 828 | |
| Net end value ZAR | R2 644 592 | R2 828 694 |
| Difference | + R184 102 |
Weigh up your options
A feeder fund offers global diversification, a hedge against a weakening rand, and provides a relatively simple way for the average investor to include an offshore component in their portfolio, with a lower investment amount than required by a direct investment. The above examples have shown, however, that the costs are generally higher and the tax could be more onerous (if the currency depreciates) than with a direct offshore fund.
As always, an investment strategy should be tailored to each individual’s needs and goals, and we urge you to speak to a qualified financial adviser to ensure your strategy will best serve your needs.
Click here to read more about the Glacier Offshore Investment Plan, which provides access to a universe of direct funds.
