Do unit trusts invest in financial markets outside of South Africa?

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:

• Invest in rands in a fund based in South Africa that buys shares, bonds and other securities from overseas markets.
• Invest in a foreign currency (eg US dollars or pounds) in a fund based in a country other than South Africa that buys shares, bonds and other securities from overseas markets.
  
  

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 funds
  Can invest up to 45% in offshore markets.

• Global funds
  Must invest at least 80% of the fund in markets other than South Africa.

• Regional funds
  Must invest at least 80% of the fund in markets other than South Africa in a single country such as China, or region such as Asia.

• Worldwide funds
  The managers of worldwide funds have no restrictions on how much to invest locally or offshore and can tilt their allocations to one or the other, depending on which market they believe will perform better for you.

Global 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:

• South African investment professionals choose which investments to make in foreign markets;
  
  
• The company partners with a foreign asset manager and that manager's investment professionals choose where in foreign markets to invest;
  
  
• South African investment professionals select a range of foreign managers to manage a portion of the fund (the fund is multi-managed); 
  
  
• The investments are made into a single offshore fund (the fund is a feeder fund); or
  
  
• An index on a foreign market is tracked (the fund may be either an index fund or an exchange traded fund). 
  
  

Why do rand-based foreign funds sometimes close to new investments?

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 45% 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?