Gaining Offshore Exposure

Direct versus Feeder Funds

As a South African investor, there are a number of ways to gain offshore exposure, namely investing directly in an offshore fund or investing in a feeder fund. The investment decision to determine which of these is most appropriate involves some considerations.

Are these two investment routes similar?
The main similarity is that they both provide an investor with offshore exposure to foreign markets.

How do they differ?
The first distinction lies in how offshore markets and funds are accessed:

Direct offshore fund:

South African residents over the age of 18 are allowed to remit R1 million per calendar year under the Single Discretionary Allowance (SDA) and an additional R10 million per calendar year under the foreign investment allowance, known as the Approved International Transfer (AIT), which requires approval from SARS. The AIT PIN is valid for 12 months, and the investor must remain tax compliant to use it. Both allowances can be used to invest in offshore funds, with investments made in foreign currencies such as US Dollars or British Pounds. Withdrawals can be kept in foreign currency and do not have to be remitted to South Africa.

Feeder fund:

This investment is made in ZAR, by investing in a local feeder fund that ‘feeds’ into an offshore fund. When an investor requests a withdrawal from the feeder fund, it is paid in ZAR. The investor therefore is not required to invest in foreign currency directly, as the ‘swap’ from ZAR to foreign currency is done within the feeder fund. Since the fund is being accessed locally and the investment is done in ZAR by the investor, it does not use their single discretionary allowance, and no SARS clearance is required for that individual investor.

Direct Offshore Fund	Feeder Fund
Potentially requires a higher minimum investment amount.	Generally requires a lower minimum investment amount.
Due to South Africa’s FATF grey listing, enhanced due diligence on South African investors is required by offshore companies, which may result in longer lead times for opening an investment account.	As a South African fund, local investors experience standard onboarding procedures for investment account openings.
Investor’s funds are externalised.	Investor’s funds remain in ZAR.
Utilises the investor’s own offshore allowances.	Utilises the foreign investment allowance of the management company of the feeder fund. Does not utilise the investor’s foreign allowance.
Rand depreciation is not factored into any capital gain.	Rand depreciation is factored into any capital gain.

How does the calculation of tax play a part?
The tax treatment between the two differs. For investment directly into offshore funds, currency movements are not considered in the tax calculation over the investment period. Capital Gains Tax (CGT) is calculated on the investment gains at the prevailing exchange rate at the time of sale.

In contrast, Feeder funds are priced daily in ZAR, and any foreign currency movements are included in the daily price and therefore impact the value of the investment daily, and consequently the potential CGT. CGT is calculated on the investment and currency gains or losses at the time of sale.

In conclusion
When deciding the best approach for offshore investment exposure, both direct offshore funds and feeder funds have their advantages, depending on individual needs and preferences.

Please note that any information in our posts, documents, infographics, emails etc is general information and should not be considered as providing financial advice. We therefore disclaim all liability and responsibility arising from any reliance placed on such information by any reader, client or visitor to our website. Though we make every effort to ensure the accuracy of the information provided we accept no liability for any inaccuracies.