Portfolio manager says go for US dollar-denominated stocks
Icaught up with an SAbased private client portfolio manager to commiserate on the longstanding poor economic environment, the harm caused by Covid-19 and how to formulate an investment strategy in such times.
But I was immensely surprised. His 2019 client assets under management (AUM) had risen 55% on the previous year, due to the US stock market rising 33% that year. So far in 2020, AUM are up 22% due to the rand’s 30% drop. This currency depreciation exceeds the fall in global and US stock markets. All this means is that his clients are a lot better off in rand and US dollars than they were at the start of 2019.
The secret to his clients’ success is having as little as possible of his clients’ money invested in SA, with the bulk of a portfolio to be housed in US dollar-denominated stocks.
“There is nothing unpatriotic about this approach,” he says. “The JSE has been a poor performer, declining from 55,000 to 49,000 over the past few years. Without the contribution of Naspers-Prosus (consisting of more than 20% of this index), it would have been a lot bleaker.”
SA Inc stocks that mainly rely on the SA economy have gone sideways to down in recent years. When SA had some reasonable economic growth, the situation was different. At least in those days it was possible to squeeze some growth out of the locally listed.
But not any more, worsened by the weak rand. Since 1973, our currency has devalued by an average of 7% a year. So even when the economy was relatively strong and the JSE was rising nicely in tandem with that, investors who wanted to measure performance in real currency remained exposed to the damage done by a declining rand, except for highly niched rand hedges or selected miners.
At the close of 2019, the rand/dollar rate was about R14, and a few months later, with coronavirus, it is nearer R19. So just on currency movements, even if a foreign portfolio did not perform, a meaningful currency gain would have been made.
His offshore approach is simple. Invest as much as possible offshore in a handful of stocks that not only do well in “normal” economic conditions but which will also benefit from the effect of Covid-19. His preferences are Amazon, Visa, Mastercard, Microsoft, Google, Johnson & Johnson, Procter & Gamble, Nestlé and Unilever.
Amazon is a no-brainer. Not only was it growing rapidly long before Covid-19, but the pandemic has resulted in unprecedented demand for home-delivery consumer goods. Visa and Mastercard have done well as fewer people use cash for fear of spreading the virus. Microsoft’s Skype and Teams are used extensively, alongside Zoom, for virtual meetings.
As people become more health conscious, wishing to maintain strong immune systems, large pharmaceutical manufacturers should benefit. The company that produces a proven virus vaccine stands to make huge amounts of annuity income over many years. And, of course, food companies will continue to make good, sustainable profits.
There should be no exposure to airline, banking or tourism. Conspicuous consumption stocks, such as pricey cars and luxury goods, will be out of favour, as hundreds of millions of people worldwide lose jobs. The need to impress in a Covid19 world will be less important.
Gold has made a comeback during the pandemic, though not yet to the degree expected at the start of the outbreak. It pays no dividends and the best way to get exposure to the metal is probably via an exchange traded fund, rather than a physical holding as obtained through mining stocks. So, a small allocation of 5% to 10% of a total portfolio probably makes sense.
His message is simple. Take all the money you don’t need for everyday living and invest it offshore in US dollardenominated stocks. Leave enough just to satisfy your income requirements in SA for the next few years.
TAKE ALL THE MONEY YOU DON’T NEED FOR EVERYDAY LIVING AND INVEST IT OFFSHORE