An avalanche of advertising from local institutions promoting their international products is disguising one of the most exciting features of Tuesday’s partial exchange control relaxation – your ability to choose any intermediary, any investment house and any financial product in the world after decades of confinement to a small market.
You only need to go to your bank and sign two simple forms to identify yourself to the Reserve Bank and state that your tax affairs are in order before you can buy up your allowance of foreign currency. That money can then be used to buy any investment of your choice abroad.
John Morris of TriStar International Consulting says some South Africans will feel more comfortable using the advice and products offered by their local bank, unit trust company or life assurer.
But those who want to make more active decisions and cut down on the commissions and management fees they would pay intermediary agents and institutions, can go directly to the investments of their choice.
For example, there is nothing to stop you from undertaking your own research and on that basis approaching a discount brokerage in New York, and requesting $10 000 of General Electric, $10 000 of Microsoft and $10 000 of Du Pont shares – thus cutting out a local financial adviser, local bank or foreign unit trust company.
Or, if you want a portfolio more widely representative of a market or region, you could approach one of the many internationally managed index-tracking unit trusts directly. They usually have very low entry and management fees.
Morris says there is a huge amount of information available on international investments on the internet and in foreign magazines and publications, certainly enough to help those who are prepared to take more responsibility for their decisions.
Query costs when you buy foreign investments
International investments are going to be more expensive than local products but, since costs can vary quite significantly, you must compare them before making a decision.
Foreign products sold by South African-based companies are likely to be structured in a way that is familiar to local investors, though you will pay more for international management expertise than you do for local investment management.
For example, the local unit trusts that you are familiar with usually levy about 0,75 percent in annual management fees, whereas management fees on the international products are at least 1,5 percent a year and sometimes higher.
The more organisations you are dealing with in one product – local broker, local institution, foreign fund manager – the more fees you could be paying, so shop around.
Ensure you know exactly what you are paying since a number of the umbrella funds charge not only an entry fee and an annual management amount but an additional initial charge for each of the subsidiary funds that you choose.
Products offered to South Africans by international financial services companies can be structured in various ways. Instead of paying an initial charge and an annual management fee (which is deducted proportionately each month) as you do with a local unit trust, international investment products can be “back-end loaded” or “no-load” funds.
A back-end loaded fund is one where you do not pay when you invest but when you sell, and you can be penalised more heavily for selling sooner rather than later. In some investments, if you hold onto them long enough, you will pay no back-end charge. There is likely to be an annual management fee.
A no-load fund is one which apparently has no costs either when you invest or when you sell, though an annual management fee is likely. No investments are free – obviously the company offering the product has to make some profit on it so costs can be built into the product and invisibly deducted from the returns before they are paid to you.