1
Cognizant
2ND QUARTER 2024
by Old Mutual Wealth
THE RELENTLESS PURSUIT
OF RELEVANCE
BEYOND GEOGRAPHIES
AND GENERATIONS
FROM CODE TO CLOUD:
UNVEILING MICROSOFT’S
COMPETITIVE ADVANTAGE
SHOPRITE: WINNING
WHERE IT MATTERS
NAVIGATING FOREIGN
INHERITANCE AS AN
SA TAX RESIDENT
2
3
THE RELENTLESSPURSUIT OF RELEVANCE Contents ANDREW DITTBERNER, CHIEF INVESTMENT OFFICER AT PRIVATE CLIENTS BY OLD MUTUAL WEALTH
THE RELENTLESS PURSUIT OF RELEVANCE 4
FROM CODE TO CLOUD: UNVEILING MICROSOFT’S COMPETITIVE ADVANTAGE 8
SHOPRITE: WINNING WHERE IT MATTERS 11
NAVIGATING FOREIGN INHERITANCE AS AN SA TAX RESIDENT 14
BEYOND GEOGRAPHIES AND GENERATIONS 16
4
emaining relevant in
today’s fast-paced,
technology-driven
world is increasingly challenging. This
is evident in the decreasing lifespan
of S&P 500 companies. According to
consulting firm Innosight, the average
company lifespan has declined from 61
years in 1958 to just 18 years today. In
The Relentless
Pursuit of Relevance
ANDREW DITTBERNER, CHIEF INVESTMENT OFFICER AT PRIVATE CLIENTS BY OLD MUTUAL WEALTH
this increasingly Darwinian corporate
landscape, it is crucial to understand
how effectively a business allocates its
finite capital and resources.
The full impact of the COVID-19
pandemic is still slowly playing out
in consumer and market behaviour,
as pre-pandemic trends sharply
accelerate. For example, the number
of industrial businesses in the
S&P 500 has dropped from 166 in 1969
to about 75 today, while technologyrelated businesses have increased
from 16 to 65 (excluding the likes of
Alphabet, Amazon and Meta, listed
under separate industries).
This shift creates significant challenges
for company management teams. As
R
5
decorated with expensive art. Every
capital expense comes with an
associated opportunity cost – i.e. the
potential return that could have been
earned elsewhere. Capital allocation
decisions that do not generate returns
above the cost of capital destroy
shareholder value and jeopardise a
company’s future.
Interestingly, despite the need for
substantial investments in digital
and sustainability transformations,
a recent Boston Consulting Group
(BCG) report shows that over the past
decade, capital expenditure relative
to revenue in the US has dropped
by around 10%. Meanwhile, capital
returned to shareholders through
buybacks and dividends, along with
cash balances, have risen by about a
third. This indicates a reluctance to
spend capital, which is not due to a
lack of opportunities. Persistently low
interest rates and bond yields have
certainly played a role, as has the
financial engineering of buying back
shares at face value only to reissue
them to management or employees
through share-based compensation
schemes.
The evidence, however, is clear:
companies making smart investments
are winning. BCG’s report shows that
the top performing companies – those
in the top third of market valuation
growth relative to peers – invested
about 50% more in capital expenditure
(capex) than their peers. As shown in
graph 1, these outperformers achieved
56% higher returns on assets and
approximately 65% higher sales
growth over the five-year period
to 2023.
THE RELENTLESS PURSUIT OF RELEVANCE
Graph 1: Outperformers Invest More and Achieve Higher Returns and
Growth
-40
-20
0
20
40
60
80
Net Capex* vs Peers
5yr Avg
Return on Assets vs Peers
Sales Growth vs Peers
%
Outperformers Underperformers
Source: Boston Consulting Group: The Art of Capital Allocation (Nov 2023)
*Net capex is defined as total capex relative to the asset base.
industry boundaries blur and hybrid
industries emerge, management
must consider how to stay relevant.
They need to assess whether they
have the necessary technology, and
if not, decide whether to build or
acquire it. If this is not a priority, they
then face the choice of whether to
return excess capital to shareholders
through dividends or share buybacks;
alternatively, they can pay down debt,
or hold on to idle cash on their balance
sheets.
Alongside rapid technological
advancement, companies also face
the challenge of becoming more
sustainable in their operations and
products. In the face of these challenges
and the evolving landscape, capital
allocation has become increasingly
critical for a business’ survival and
relevance, and remains the CEO’s top
responsibility.
Renowned capital allocator Warren
Buffett put it succinctly when he
addressed the most important role
of a CEO and why so many fail at it:
“Once they become CEOs, they face
new responsibilities. They now must
make capital allocation decisions, a
critical job that they may have never
tackled, and this is not easily mastered.”
The reason for this is that the skills
required to become a CEO often focus
on general management rather than
capital allocation decisions.
UNPACKING CAPITAL
ALLOCATION
Investing can seem relatively straightforward: capture the fundamentals, tick
the necessary boxes, arrive at a valuation,
and construct a sensible portfolio. However,
the complexity lies in understanding the
industry a company operates within
and identifying its competitive
advantages. The most subjective aspect of
an investment decision is determining
whether the management team can
allocate capital prudently to ensure that
the business strategy is well executed.
Capital allocation is not about building
an ivory tower or fancy headquarters
6
OPTIONS FOR
ALLOCATING CAPITAL
Capital can be generated or raised
in several ways. The most important
source is operational cash flow, which
is what is left over once operating
expenses are covered. Other capital
raising avenues include disinvestments,
issuing new shares or borrowing
money.
Management teams then have various
options for allocating their companies’
capital:
1. Reinvesting in the business:
This can drive organic growth
by either expanding or optimising
current operations to increase growth,
efficiencies, and ultimately profitability.
2. Acquisitions: While
growing inorganically
through acquisitions are viewed
as quick wins, they can lead to the
downfall of many businesses given
the risks involved. These are discussed
in more detail below.
3. Paying down debt: This is a
particularly attractive option
for businesses that have stretched
balance sheets. Ensuring that the
business is healthy by maintaining
an adequate debt-to-equity ratio is
viewed favourably among investors.
4. Returning capital to
shareholders: This can be
done either through share repurchases
or by paying dividends to shareholders.
Both options are generally viewed
positively by investors when done
under the right conditions.
WHAT WE LOOK FOR
At Private Clients, we have specific
preferences for how the businesses
we invest in should allocate capital.
Many companies adopt a dividend
policy and rigidly adhere to it,
allocating a percentage of earnings
to shareholders annually. While this
approach is common, it often overlooks
other capital allocation options.
A set dividend policy poses two main
problems. Firstly, investors become
reliant on the dividend payment and
any sign of the dividend being at
risk, for whatever reason, can lead to
a significant drop in the share price.
Secondly, management may prioritise
maintaining the dividend over better
capital allocation options, sometimes
even increasing debt to ensure the
dividend is paid.
We believe that dividends should be
considered only after exploring other
capital allocation options. For more
income-reliant investors, fixed income
securities such as cash or bonds may
be more effective as opposed to relying
on dividend income. Warren Buffett,
for example, has a philosophy of not
paying dividends, believing that he
can allocate capital more effectively
(and this has proven to be the case)
than Berkshire Hathaway shareholders.
Although Berkshire’s cash reserves
are steadily growing, and pressure is
mounting for him to do something
with it, Buffett remains prudent,
ensuring the cash is not hastily spent.
7
MAINTAINING RELEVANCE THROUGH CAPITAL ALLOCATION
Investing involves both science and art. Identifying companies that align with our investment philosophy is relatively
straightforward. Building a valuation model requires a little more art. However, the real challenge lies in assessing
whether an industry is facing disruption, whether the management team has the strategic vision and skills to
navigate the environment, and whether the required opportunities are present. This requires careful consideration
and critical thinking that is not prone to groupthink.
At Private Clients, each of our model portfolios has a subcommittee dedicated to discussing such issues. While it
is ultimately the portfolio managers’ responsibility to make investment decisions, no decision is made hastily or
without vigorous debate. While it is highly uncommon for the sub-committee to reach unanimous agreement,
it is vital that all views are thoroughly considered. We believe that this robust framework, supported by years
of experience, ensures sensible decision-making. It is essential that the businesses we invest in for our clients
demonstrate continued relevance through prudent capital allocation decisions.
Another concern we have regarding
capital allocation involves companies
that initiate share buyback
programmes and then rigidly adhere
to them, regardless of price. This
practice is akin to setting a monthly
budget and ensuring that it is met,
even if the expenditure is not necessary.
Companies often end up buying
back shares at inflated prices due to
a buyback programme being in place.
A more significant concern arises
when companies issue some of the
repurchased shares to management
or employees as part of share-based
compensation.
Acquiring and disinvesting from
businesses is common. Our
preference is for acquisitions where
the acquired business either aligns
with or complements the current
business operations. While the allure
of new ventures can be enticing,
they often come with significant
risks. It also goes without saying that
management should not overpay for
acquisitions, which is easy to do when
using shareholder capital. Another
preferable criterion for acquisitions
is that they should be funded from
internally generated cash, as opposed
to raising debt or issuing shares.
Finally, we advocate for a strategy of
making smaller, bolt-on acquisitions
rather than betting heavily on a single,
massive acquisition. This is referred to
as firing bullets, not canons.
LOOKING BACK AT
TRACK RECORDS
The landscape is littered with
examples of both superb and poor
capital allocation decisions. Articles
later in this edition will explore two
examples of companies staying
relevant through prudent capital
allocation decisions. However, Xerox
provides a stark example of how illconsidered and poorly timed capital
allocation decisions can lead to a
company’s demise.
After listing on the New York Stock
Exchange in 1961, Xerox achieved great
success. It became one of the Nifty Fifty
stocks in the 60s, with its share price
soaring from US$0.77 in January 1962
to $8.30 by the end of 1969. Riding on
this stellar share price growth and eager
to enter the burgeoning computer
industry, then CEO Peter McColough
sought to acquire a computer capability.
Developing their own capability was
deemed unfeasible given how fast the
field was growing, raising concerns
that they would never catch up.
Consequently, Xerox decided to acquire
Scientific Data Systems (SDS) in 1969.
With Xerox’s share price at astronomical
levels, the acquisition was concluded at
a ratio of one Xerox share for every two
SDS shares, totalling close to US$1bn.
SDS was quickly renamed Xerox Data
Systems (XDS).
Nearly half of XDS’s business was
linked to the space programme
at the time. The first astronauts
landed on the moon shortly after
the acquisition was concluded, and
since the computers needed for that
programme were already in place,
the growth of that market could
only decline. The recession of 1970
was the death blow for XDS. Facing
US$250m in operating losses on top
of the US$1bn acquisition cost, Xerox
opted to sell XDS to Honeywell in 1975.
This deal remains one of the costliest
acquisitions in American business
history.
Xerox’s downfall can be attributed
to several factors: the euphoria of a
rising share price, the glamour of the
exciting new computer field, the allure
of the unfamiliar, inadequate research,
overoptimism, and groupthink. Many
lessons from Xerox’s experience can
be applied in today’s market.
8
From Code to Cloud: Unveiling
Microsoft’s Competitive
Advantage
NADINE CHETTY-KHAN, RESEARCH ANALYST AT PRIVATE CLIENTS BY OLD MUTUAL WEALTH
n the fast-paced world of
technology, Microsoft is a
titan known not just for its
innovative prowess, but also for its
strategic capital allocation strategies
that have steered the business through
evolving market conditions. From its
humble beginnings in 1975 to its
status as a global leader, Microsoft’s
journey is marked by a keen focus
on research and development (R&D)
I investment and strategic acquisitions,
all underpinned by a commitment to
long-term shareholder value.
Since its inception, Microsoft
has focused heavily on software
development and has consistently
set aside a significant portion of
its capital for R&D and strategic
acquisitions, driving its continuous
pursuit of innovation. This strategic
reinvestment back into the business
has been instrumental in laying the
foundation for a suite of globally
integral products such as the Windows
operating system, Microsoft Office
suite and Azure cloud platform.
Microsoft’s financial prudence is
evident in its balanced approach
to capital allocation and increasing
return on invested capital. While
9
and is testament to the company’s
effective management of capital,
which involves learning from mistakes
and taking corrective action.
Under Nadella’s leadership, Microsoft
shifted its focus towards cloud
computing, artificial intelligence
(AI) and other emerging areas.
Azure showcases this strategy,
with substantial investments in
infrastructure and services leading
to impressive growth and positioning
Microsoft as a strong competitor
to Amazon Web Services (AWS).
LEARNING FROM
MISTAKES AND DRIVING
TRANSFORMATION
Microsoft encountered challenges
along the way. Under Steve Ballmer’s
leadership from 2000, the company
faced scrutiny for some capital
allocation decisions. While paying
dividends showed a commitment
to shareholder value, the acquisition
of Nokia’s mobile business received
mixed reactions. However, the real
transformation came with Satya
Nadella’s appointment as CEO in 2014
R&D investments drive innovation,
the company maintains a robust
balance sheet, which ensures stability
and enables strategic investments.
Its dividend has grown at an annual
compounded rate of 19.3% since 2003
and, together with its share buybacks,
reflects the company’s commitment
to rewarding long-term investors
while pursuing growth opportunities.
Maintaining a balance between organic
growth and strategic acquisitions
ensures that Microsoft remains nimble
without compromising its financial
strength.
FROM CODE TO CLOUD: UNVEILING MICROSOFT’S COMPETITIVE ADVANTAGE
Graph 1: Microsoft’s capital allocation
0.0%
10.0%
20.0%
30.0%
40.0%
-
20 000
40000
60 000
80 000
100 000
120 000
140 000
2017 2018 2019 2020 2021 2022 2023
US$'m
Repayment of debt Dividends paid Share buyback proceeds Capital expenditure
Acquisitions, Net of Cash Acquired Return on Invested Capital R&D expense
Sources: LSEG and Private Clients
Graph 2: Microsoft’s revenue by product
50 000
150 000
200 000
250 000
FY19 FY20 FY21 FY22 FY23
Server Products and Cloud Services Office Products and Cloud Services Windows Gaming LinkedIn
Search and News Advertising Enterprise Services Devices Dynamics Other
10
platforms by 2027, up significantly
from 15% in 2023.
By seamlessly integrating AI into its
product lines and developing Azure AI
services, Microsoft has positioned itself
at the forefront of the AI revolution.
A key aspect of the company’s AI
growth strategy lies in its partnerships,
including its collaboration with OpenAI,
a leader in AI research, which aims
to accelerate AI breakthroughs and
make AI more accessible globally.
After partnering with Microsoft in 2019,
OpenAI successfully launched ChatGPT
in 2022 and gained over 100 million
monthly users in just two months.
Looking ahead, this partnership holds
immense potential for both companies.
By leveraging OpenAI’s expertise,
Microsoft can further differentiate itself
in the competitive AI landscape and
capitalise on new growth opportunities.
Similarly, OpenAI benefits from
Microsoft’s extensive reach and
resources, enabling it to scale its efforts
and bring AI technologies to a broader
audience. Gartner predicts that by 2026,
80% of businesses will use generative
AI applications, up from just 5% in 2023.
As AI continues to reshape industries
and drive innovation, Microsoft and
OpenAI are well positioned to lead
this change.
Azure’s revenue surged by an
impressive 30% in the last financial
year, highlighting its rapid expansion
and growing competitiveness in the
cloud market. The shift was facilitated
by strategic acquisitions like LinkedIn
in 2016 and GitHub in 2018, which
seamlessly integrated into Microsoft’s
ecosystem and bolstered its competitive
edge. The acquisition of LinkedIn
strengthened Microsoft’s position in
professional networking, while GitHub
provided a platform for open-source
collaboration and enriched Microsoft’s
developer community.
ADAPTING IN AN
EVER-EVOLVING
ENVIRONMENT
Microsoft has demonstrated remarkable
flexibility in response to changing
market dynamics and technological
advances. In its formative years,
Microsoft faced fierce competition,
including Apple’s Mac and Lotus 1-2-
3, which dominated the spreadsheet
software market in the 1980s. However,
Microsoft’s pivotal strategic move came
with the development of Windows,
which solidified its position as a software
powerhouse, as its applications were
able to seamlessly integrate with the
platform. While competitors were slow
to adapt, Microsoft flourished.
As technology evolved, new challenges
emerged, including Apple’s resurgence
with its design-centric approach to
electronics and ecosystem integration
and Google’s entry into search engine
and cloud-based services. Additionally,
Android OS emerged as a competitor
in the mobile space, while Amazon
Web Services (AWS) disrupted the
cloud computing market. In response,
Microsoft has consistently invested in
innovation, ensuring that its offering
evolved to meet customer needs,
thereby defending its market share.
THE ERA OF APPLIED
TECHNOLOGY
Applied Technology – which leverages
knowledge and technology to create,
design or improve products and
processes – is seen as the new frontier of
the 21st century. This field incorporates
AI, gene and cell therapy, robotics, and
the Internet of Things. At Private Clients,
we recognise Applied Technology as a
key long-term investment theme, and
Microsoft provides us with significant
exposure to this growth area.
Microsoft has prioritised cloud
computing and AI as strategic growth
areas. Investments in Azure have
positioned Microsoft as a leading
player in the cloud computing market,
challenging competitors like AWS.
While Amazon dominated the public
cloud services market with a 40% share
in 2022 as per Gartner (vs Microsoft’s
21.5% market share), its revenue growth
was slower, at a 33% compounded
annual growth rate compared to
Microsoft’s 60% between 2016 and
2023. Gartner predicts that the cloud
computing market will grow by around
20% annually from 2001 to 2027, with
over 70% of businesses using cloud
INVESTING IN MICROSOFT’S LEGACY AND
FUTURE
Microsoft’s strong track record of effective capital allocation and competitive
success is a testament to its strategic acumen and financial discipline. The
company’s solid financials, strategic vision and commitment to innovation
make it an attractive investment. As a leader in technology with a clear
path forward, we believe that Microsoft is poised to continue its legacy
of creating shareholder value, and the company therefore remains a key
holding within our Private Clients Global Equity Portfolio.
11
he best decisions
have little to no
immediate payoff.
The best choices compound. Most of
the benefits come at the end, not the
beginning. The more patient you are,
the bigger the payoff.” – Shane Parrish
The vastly divergent performances
of South African food retailers over
Shoprite: Winning
Where it Matters
VICTOR MUPUNGA, HEAD OF RESEARCH AT PRIVATE CLIENTS BY OLD MUTUAL WEALTH
the past 20 years are one of the best
illustrations of how management
decisions affect long-term success.
Back in 2004, with a market value of
R11.2bn, Pick n Pay was the largest food
retailer on the JSE. The business was
60% larger than its closest competitor
Shoprite (R7.1bn) and more than three
times Spar’s size (R3.6bn). Today, Shoprite
is worth around R152.5bn, making it 12
times larger than Pick n Pay, while Spar’s
value has increased six-fold to R20.1bn.
Meanwhile, Pick n Pay’s value has barely
changed, currently at around R12.3bn.
Given that Pick n Pay and Shoprite have
similar business models and operate
within the same challenging local
economy, it is worth considering why
their fortunes have been so different.
\"
T
12
HOW DID WE GET HERE?
At Private Clients, free cash flow is a
key metric we use when analysing
a company, as it shows how much
capital is left within the business after
funding essential activities, such as
interest payments and maintenance
capital expenditure (capex). Essentially,
management can use this leftover
capital for any opportunity they believe
will generate superior returns. This
often includes acquisitions, dividends
or reinvestment into the business.
Notably, between 2000 and 2004, Pick
n Pay and Shoprite generated similar
free cash flow, with both companies
accumulating around R2bn at the end
of 2004. But despite starting from the
same point, their trajectories have been
vastly different since then.
The priorities of Pick n Pay and Shoprite’s
management teams are evident in
how they allocated capital between
dividends and capex between 2000
and 2010, as shown in graph 2. For
the first half of the decade, Shoprite
matched its dividend growth with a
similar level of reinvestment into the
business, slowing down its capex only
during the 2007/2008 Global Financial
Crisis and then quickly picking up
again. In contrast, Pick n Pay increased
its dividends at a compound annual
growth rate of 25% over the period,
more than double the 12% growth rate
of its capex. On average, Pick n Pay
paid 76% of its earnings as dividends,
while Shoprite’s dividend was less than
half of its earnings. In what at that
time was a fast-growing economy,
this focus on short-term gains rather
than reinvesting into the business
allowed smaller competitors like Spar,
Woolworths and Shoprite to flourish.
We believe that this capital allocation
SHOPRITE: WINNING WHERE IT MATTERS
Graph 2: Growth in dividends versus capital expenditure
-100.00
400.00
900.00
1400.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Dividend and Capex growth rebased to 100 (2000 - 2010)
Shoprite Dividend Paid Pick n Pay Dividend Paid
Shoprite Capex Pick n Pay Capex
Graph 1: Cumulated free cash flow generated over the period*
500
1 000
1 500
2 000
2 500
2000 2001 2002 2003 2004
ZAR - millions
Cumulative free cash flow (2000 - 2004)
Shoprite Pick n Pay
13
mistake has been Pick n Pay’s biggest
error over the past two decades, and
the company has not yet fully recovered
from it.
In the early 2000s, Shoprite built an
extensive distribution network, store
footprint and IT systems. As its market
share and bargaining power with
suppliers grew, Pick n Pay could not
keep up with Shoprite’s capex scale.
By the time Pick n Pay realised this,
its market share, earnings and cash
flow were declining. By the end of
the decade, Shoprite’s astute capital
allocation allowed it to spend more
than three times what Pick n Pay
could on capex. This gave Shoprite a
strong and hard-to-replicate leadership
position based on offering consumers
lower prices. Like all good decisions,
the benefits of Shoprite’s superior
historic capital allocation strategy
have continued to compound. The gap
between the two businesses has further
widened, as shown by Shoprite’s recent
annual dividend of R3.5bn, while Pick
n Pay had to suspend its dividend in
a bid to strengthen its balance sheet.
FAILING FAST
Apart from the Covid-19 period, 2018
and 2019 were likely the toughest years
for Shoprite in the last two decades.
During this time, the group’s share
price declined by nearly 60% due to a
sharp increase in foreign-denominated
debt taken on to expand across Africa.
Adverse currency moves, difficulty
in repatriating cash to SA and weak
commodity prices saw the group’s
rest of Africa operations – once viewed
as a key differentiator – become a
burden rather than an advantage.
However, actions taken by Shoprite’s
management team turned out to be
another example of effective capital
allocation.
In a short time, the group exited its
loss-making non-SA operations, closed
poorly performing stores, and launched
Checkers Sixty60 and its Xtra Savings
rewards programme. Furthermore, the
group also sold some of its distribution
centres and leased them back. From
an incentive perspective, the board
enhanced executive remuneration by
including performance hurdles that
ensured stricter capital allocation. The
result was an increase in free cash
flow from a negative R2.4bn in 2019
to an average of R4.3bn per year over
the next four years. This highlights
that while capital allocation errors will
happen, it is crucial to fix them quickly.
As the late Charlie Munger once said,
“Mistakes never get better while you
wait, fix them quickly.” Ideally, such
errors should arise from making “small
bets” rather than large acquisitions that
could devastate the business if they fail.
MAKING MANY “SMALL
BETS”
Since closing its loss-making non-SA
operations, Shoprite has focused on
providing a wide range of value-added
services for local consumers. This
includes its mobile network K’nect,
which offers one of the cheapest data
packages in the country (R19.50 per
GB) for Shoprite account holders. The
group is also expanding into adjacent
categories such as baby clothing
(Little Me), pet products (PetShop
Science), clothing (UNIQ) and outdoor
equipment (Checkers Outdoor). Given
that these ventures are often located
near existing stores and benefit from
Shoprite’s scale and cost advantages,
they require minimal capital cost and
offer competitive pricing.
While none of these small bets alone
will drastically transform the group
in the short term, they present an
opportunity to increase Shoprite’s
share of consumer spending in a lowgrowth economy. Furthermore, with
the increased investment in Checkers
Sixty60 through the launch of its R99
monthly subscription for unlimited
delivery, the group is aiming to boost
long-term customer value rather than
immediate profits from its fast-growing
delivery business. We regard these as
prudent capital allocation decisions
that diversify the business without
risking too much. Coupled with the
group’s strong data analytics that
are supported by the largest loyalty
programme in the country (28 million
Xtra Savings members), Shoprite has a
significant advantage that competitors
will find hard to match.
WINNING OVER THE
LONG TERM
Given that few businesses
are as dependent on the
macro economy as retailers,
it is interesting to observe the
divergent performances within
the sector. While economic
conditions certainly affect
companies, especially over the
shorter term, we believe that
management decisions on
where to invest capital matter
more in the long run. Shoprite
has excelled in this regard and
has shown adaptability over
time, unlike many of its peers.
We expect the group’s current
capital allocation strategy of
investing in adjacent categories
to steadily increase its share of
consumer spending. This will
drive returns and ultimately
compound over the long term,
as all good decisions tend to do.
14
Navigating Foreign Inheritance
as an SA Tax Resident
GODWIN MAGOSHA, FIDUCIARY SPECIALIST AT PRIVATE CLIENTS BY OLD MUTUAL WEALTH
nheriting assets from
abroad can be both a
blessing and a challenge
for South African residents.
Consider, for example, an SA resident
inheriting a flat in the UK from a
relative who emigrated long ago.
Suddenly, the resident now has a
worldwide estate that includes an
offshore asset. If the resident decides
to rent the flat out, they will need to
register as a UK taxpayer and include
the foreign rental in their SA tax
I return. What are the estate planning
considerations and options?
A BRIEF OVERVIEW OF
SA LAW ON FOREIGN
INHERITANCE
SA law offers specific provisions for
handling foreign assets inherited
from tax non-residents. These include
exemptions from Exchange Control
Regulations and Donations Tax, as
well as certain deductions under the
Estate Duty Act.
In a nutshell, an SA resident does not
have to disclose an inheritance received
from a non-resident if the inheritance
is located outside SA. Furthermore,
this foreign inheritance can also be
disposed of without reporting the
disposal to the SA Reserve Bank’s
Financial Surveillance Department.
However, local tax disclosures and
compliance will apply to the disposal.
While the foreign property inherited
will form part of the resident’s total
15
estate, it is excluded by way of a
deduction under section 4(1)(e) of the
Estate Duty Act. Moreover, the foreign
property inherited can be donated
without triggering donations tax in
South Africa, due to the exemption
from donations tax under section
56(1)(e) of the Income Tax Act.
If the foreign property is sold, the
base cost used in the calculation
of capital gains is the market value
of that property at the death of the
non-resident plus costs incurred in
respect of the foreign property by the
executor, in the process of winding
down the estate.
If the foreign property is donated to
a foreign trust, resulting in income
distributions to a non-resident, the
attribution rules apply, and the income
distributed to the non-resident is
included in the resident’s income.
ESTATE PLANNING
OPTIONS
One of the main objectives for residents
inheriting foreign properties might
be to avoid becoming subject to tax
in foreign jurisdictions. Alternatively,
they may seek to hold the property in
a manner that reduces estate planning
complexities. Whatever the objective,
making an informed decision requires
a thorough understanding of both
SA law and the laws governing the
jurisdiction where the property is
situated.
Within the scope of SA law, residents
have several options when dealing with
inherited foreign assets, including:
• Direct ownership: Holding the
property and renting it out may
subject the resident to taxes
in both SA and the foreign
jurisdiction, requiring annual
tax filings in both countries. A
Section 6quat rebate may apply
to foreign rental income taxed
in SA. At death, there will be
no estate duty on the foreign
property in SA. However, capital
gains tax may be payable due to
deemed disposal. As a result of
a foreign estate created by the
inheritance, the resident may need
a will dealing with that offshore
property. However, there should
be no foreign tax rebate if there
is a wealth tax on the foreign
property – because the value of
the foreign property never formed
part of the dutiable estate in SA.
• Immediate disposal: Selling
the inherited property upon
acquisition can minimise capital
gains tax exposure, though careful
consideration of market value and
base cost is essential. The proceeds
could be invested anywhere in
the world, without applying for
Financial Surveillance Department
permission, and the replacement
property is excluded from the SA
estate – for estate duty purposes.
• Transfer to a foreign company:
Transferring the property to a
foreign company within which the
resident is a majority shareholder
could create a controlled foreign
company, requiring compliance
with the controlled foreign
company provisions of the Income
Tax Act.
• Donation to a foreign trust: The
property could be donated to a
foreign trust without triggering
South African donations tax,
but may result in income tax
obligations for distributions
from the trust to non-resident
beneficiaries.
• Sale to a foreign trust on a loan
account: Selling the property to
a foreign trust on loan account
can provide tax-eff icient
income streams, though careful
structuring is necessary. Since the
loan is based on foreign currency,
market-related interest may be
significantly lower than what
could have been charged on an
SA rand loan. The loan account
will remain level over the lifetime
of the resident taxpayer. At death,
there is no capital gains tax on
the disposal of a loan account
and the loan account will not
attract estate duty in SA. The
foreign interest income will be
included in the SA tax return, and
if there are interest payments by
the foreign trust to the resident
taxpayer, the receipts should be
sufficient to pay domestic tax. The
tax payable to the tax authorities
in the foreign jurisdiction could
be reduced by claiming tax treaty
benefits between SA and that
foreign jurisdiction.
NAVIGATING FOREIGN INHERITANCE AS AN SA TAX RESIDENT
Each of the above options carry their own tax and legal implications, requiring careful evaluation based on individual
circumstances and objectives. Professional advice is recommended to navigate both SA and foreign tax laws effectively.
In conclusion, while inheriting foreign assets as an SA tax resident presents complexities, understanding the legal
landscape can facilitate informed decision-making and optimal estate and tax planning.
16
Beyond Geographies
and Generations
SARETTE VAN DEN HEEVER AND WAYNE SOROUR, WEALTH DIRECTORS AT PRIVATE CLIENTS BY OLD MUTUAL WEALTH
r a f t i n g a n d
managing a wellstructured portfolio
of investments in one geography,
for one family can be challenging. In
today’s ever-shrinking world, where
families are scattered across the globe
and uncertainty reigns supreme,
these challenges become even more
significant.
While previous generations might have
initially focused on accumulating assets
and building wealth predominantly
within South Africa, the next generation
is being compelled to plan and manage
C their affairs globally from the outset,
says Sarette van den Heever.
“For most South African families, it
has now become the norm to have
multiple family members living,
earning, accumulating assets, and
paying tax in at least one other country.
Where you choose to live, no longer
determines where you earn income
and where you build assets – these
can all be in different and multiple
countries. Our clients with young
families are considering the reality
of their children studying abroad
and most probably settling there
permanently. In that case, they are
actively exploring options to live abroad
themselves, if only for part of the year,
and to have assets and funds available
in the local currency,” she says.
But this brings with it a host of
complexities. Once investments are
made offshore, navigating the different
laws and regulations across different
countries and currencies can become a
minefield. This complexity also extends
to owning property, setting up trusts
and managing tax and estate duties.
There’s no doubt that effectively
managing assets across
17
various jurisdictions demands a
comprehensive understanding of
the respective financial, legal and
structural considerations. “Before
making any significant decisions,
such as investing, acquiring alternative
citizenship, emigrating or taking any
unconventional steps outside South
Africa, it’s essential to seek expert
advice timeously to understand the
implications, avoid potential pitfalls
and ensure a successful outcome,”
says Wayne Sorour.
“Many people try to cut corners to
avoid investing in professional advice
to understand the implications, which
often leads to costly consequences,”
he says.
These days, many investors’ children
live, work and study abroad, often
in different countries. Others work
overseas for 10, 20 years, earn money
in that country and then come back.
“In such a situation, questions about
the efficiency of your investments
and the future of your wealth become
crucial. Are you getting the best
returns on your investments, and
should the assets be held in a more
tax-efficient legal structure? Most
of these structures should be put in
place before one leaves and/or returns
to South Africa. If you have created
a business, will it continue to thrive
after you are gone and will your loved
ones be properly cared for?
“Therefore, effective planning and
revisiting your investment portfolio
and structures several months ahead
of your departure or return can save
you a lot of tax, both here and in the
country where you have worked. I
often see how clients assume laws and
regulations regarding tax, property,
investments and estates work the
same across the world. This can lead to
immediate or future losses of millions
or prevent their loved ones from
accessing money or assets after they
have passed on,” Wayne says.
ACCESS TO GLOBAL
EXPERTS
Apart from advising clients about
the best offshore investments and
structures that would make the most
sense for their specific circumstances
and needs, Private Clients by Old
Mutual Wealth also assists with crossborder tax and fiduciary services,
advising individuals with business
interests and investments in multiple
countries. Complementing its highly
experienced in-house family office,
investment management and fiduciary
services teams, the business has also
established strong relationships with
lawyers, tax consultants and other
specialist experts outside South Africa.
“If a client has a particular need in, say,
the US where they want to emigrate
to, I know who to call. We make sure
that the client gets the right advice
so when they settle in the US, they’re
not going to get any surprises from
the tax authorities,” Wayne explains.
Planning for the future also involves
considering how your estate will
devolve to your children and loved
ones and, where applicable, how
your business will be managed into
your retirement and after your death,
says Sarette. This calls for careful and
effective succession planning.
This may sound like too many different
experts are needed to successfully
manage your wealth and everything
that goes with it, including what
happens to it once you’re gone. Dealing
with multiple financial advisers could
potentially pose a risk because there
isn’t one cohesive picture and structure.
“Indeed,” says Sarette, “that’s why we
have a ‘family office’ that is responsible
for overseeing the entire family, not
just the individuals who have been
generating the wealth. This includes
managing various structures such
as trusts and companies, whether
they are operating businesses or
other entities created to manage
wealth. The family office also assists all
family members within this structure,
including children and grandchildren,”
she explains.
“The real benefit of having this type
of structure is having one office
that manages all your affairs and
understands how everything is
interconnected, including the links
between different family members,
risks and opportunities. On a practical
level, it is invaluable to have one point
of contact to sort out anything from
complex global tax structures to
simple tasks like making payments
or arranging insurance assessments,”
she says.
BEYOND GEOGRAPHIES AND GENERATIONS
“The family office in Private Clients by Old Mutual Wealth was established
in 1925 and it has looked after some of the families for four generations.
With this comes significant learnings and established professional
relationships across the globe, all managed from South Africa. In addition
to our skilled in-house team, we work closely with families’ existing
advisers, accountants, lawyers and investment managers and we call on
a wide network of well-established professional firms to assist us in the
management of our clients’ affairs,” Sarette says.
18
The Authors
Andrew joined Private Clients in 2017 and was previously employed at Cannon
Asset Managers. He joined Cannon in 2007 as a Research Analyst and during
his tenure, he rose through the ranks to become a Portfolio Manager in 2011
and was then appointed CIO in 2014. Andrew has extensive knowledge of and
insight into valuing businesses across multiple industries and identifying suitable
investment opportunities. He holds a Master’s degree in Economic Science
from the University of the Witwatersrand, where he lectured for a while. Andrew
also holds a PhD in Investments and Securities from the University of Pretoria.
Andrew Dittberner
Chief Investment Officer
at Private Clients by
Old Mutual Wealth
Nadine joined Private Clients in March 2024 and was previously employed as
an Equity Analyst at Investment Managers Laurium Capital, Mazi Global and
Old Mutual Titan. Prior to that, she was an Old Mutual Chartered Accountant
Trainee and worked with various departments within the business, including
Private Clients’ Finance team. Nadine qualified as a Chartered Accountant at
the end of 2017 and has also completed CFA Level 2. She also completed a
Marketing and Entrepreneurship course with StartUp School.
Nadine Chetty-Khan
Research Analyst
Victor joined Private Clients in 2016 and is responsible for conducting research
relating to all aspects of our investment portfolios, including top down, bottom
up, idea generation, macro and asset allocation research. He also serves as
Portfolio Manager of the Private Clients Equity Income Model Portfolio. Victor
was previously employed as an Investment Analyst at Maestro Investment
Management, where in addition to equity research, he was responsible for
managing a number of private client equity portfolios. Prior to that, he was a
Fund Accountant at Investment Data Services where he prepared and reviewed
valuations and accounting records of hedge funds. Victor graduated with an
MBA from Stellenbosch Business School as well as a Business Science Finance
(Hons) degree from the University of Cape Town. He is also a CFA Charterholder.
Godwin joined Private Clients in 2024 as a Fiduciary Specialist. He started his
career with Old Mutual in 2006 with Personal Financial Advice (PFA) as a Financial
Analyst. He worked for Succession Financial Planning as a Broker and joined
Liberty South Africa as a Legal Adviser, before returning to Old Mutual in 2021.
Godwin is an admitted attorney of the High Court of South Africa. He holds
LLB (Unisa), BCom (Hons) (UCT), MPhil Tax Law (UCT), Postgraduate Diploma in
Financial Planning (UFS) and Postgraduate Diploma in Estate Planning (UFS).
He has over 15 years’ experience in the financial services industry.
Wayne obtained his BProc LLB at the University of the Free State and is an
admitted attorney. He joined Old Mutual as a Legal Adviser and has spent
many years in the financial services industry where he gained vast experience
in sales, wealth management and the distribution side of asset management.
Before joining Private Clients as Wealth Director, Wayne held the position of
Head of Old Mutual International: Sales and Distribution in South Africa where
he worked in the offshore market for over 15 years. He also holds a CFP®.
Sarette has spent over 15 years in the wealth management industry, holding
numerous positions within Old Mutual Wealth as a Business Development
Executive. In 2016, she moved into the Fintech industry where she fulfilled a
strategic consulting role. In 2023, Sarette joined Private Clients as a Wealth
Director and assisted the business in developing and building its high net
worth client proposition. She holds a BCom in Actuarial Science and an MBA.
Victor Mupunga
Head of Research
Godwin Magosha
Fiduciary Specialist
Wayne Sorour
Wealth Director at
Private Clients by
Sarette van den
Heever
19
Private Clients by Old Mutual Wealth (Private Clients) is a division of Old Mutual Wealth Trust Company (Pty) Ltd (OMWTC), a licensed Financial
Services Provider, Reg No: 1925/002721/07. Private Clients is authorised to provide financial services on the OMWTC licence.
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Old Mutual Wealth, Mutualpark, Jan Smuts Drive, Pinelands 7405 | Tel: +27 (0)21 524 4678 | Email: [email protected]