One of the advantages of unit trusts is that they can give you exposure to shares, bonds and other securities in financial markets other than those in South Africa.
This gives you better diversification considering that South Africa represents less than 1% of the global economy and has few or no players in certain market sectors, such as bio-technology and alternative energy.
If you use a unit trust to get access to global markets, you benefit from an experienced fund manager who can decide where in the world to invest and which assets to invest in.
There are two main ways in which you can get exposure to overseas markets. You can:
Investing in foreign markets in rands
Most unit trust funds have some exposure to markets in other parts of the world – funds whose mandates restrict them to investing only in South African markets must state as much on their minimum disclosure documents.
Depending on their mandate, and hence how they are classified by the Association of Savings and Investment South Africa, funds can invest offshore as follows:
South African fundsGlobal and regional funds are the funds you are likely to find most useful if you are specifically looking to diversify away from local investments into foreign markets.
These funds take your investment in rands and then convert into the appropriate currency to buy into foreign markets. At all times, however, you will see your investment value in rands and when you want to realise your investment, you will be paid out in rands.
South African unit trust companies offer rand-denominated global and regional funds in which:
Why do rand-based foreign funds sometimes close to new investments?
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If the rand weakens relative to other currencies over the period you are invested, your rand returns will be boosted, but if it strengthens, your returns will be negatively affected. |
The South Africa Reserve Bank has exchange control regulations in place that limit how much individual and institutional investors can invest offshore.
When you invest in a rand-denominated global or regional fund, the unit trust company must use its exchange control allowance to invest in global and regional markets.
The rules for unit trust companies limit them to investing 40% of their retail investor assets – the money they get from individual investors – in offshore markets. From time to time, some unit trust companies reach or get close to these limits. They then close their funds to new investments until the overall amount of money increases or the allocation to global and regional markets decreases and they have capacity again.
Investing offshore in a foreign currency
If you want to diversify away from rand-based investments and wish to have investments in a country other than South Africa, you need to ensure your money is in a fund that is based or domiciled in another country and invested in a foreign currency like the US dollar or the British pound.
Your fund is then said to be denominated in foreign currency and domiciled outside of South Africa. Funds denominated in a foreign currency and domiciled outside of South Africa are referred to as offshore funds.
Investing offshore is not difficult, but there are more things you need to know about and a few extra steps to take. You can read more here: How can I invest offshore?
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HAVE YOU HEARD ABOUT FEEDER FUNDS?
Feeder funds invest in a single fund offshore. They take your rands, convert them and invest in an offshore fund. When you want to get your money out, the fund converts your investment back into rands to pay you out. |
You can invest in an offshore fund in rands if the fund is offered as a feeder fund in South Africa.