Financial Mail - Investors Monthly
WAIT IT OUT
New rand strength bites people who were over-hasty in moving their money overseas, writes Johann Barnard
New rand strength bites those over-hasty in moving money abroad
Trying to time the market, any investment manager will tell you, is a mug’s game. Spooked retail investors, however, have recently outdone themselves by mistiming the shifting of money offshore in the wake of the rand’s rapid decline since late last year.
Unfortunately, the folly of this flight of capital becomes apparent only in hindsight, which in the 2016 rearview mirror shows the rand clawing back nearly 15.5% of its value by mid-August. This unexpected strengthening has surely left SA investors who moved money abroad when the rand was at its weakest vying for an Olympic gold medal in market mistiming.
To illustrate the impact of investors’ emotional decisionmaking, Prudential Unit Trusts MD Pieter Hugo made some calculations based on local investors’ panic-fuelled reactions of the past. Taking data from 2011, when the currency lost 19% of its value following Europe’s debt crisis, Hugo estimates that over a three-year period, investors would have been 120% better off if they had not shifted assets onshore.
The reason for this huge discrepancy is as much knee-jerk reaction as it is bad investment decisions.
“The important thing that I try to convey to clients is you always need to think about not only the rand, but the valuation of the asset or opportunity you’re selling in SA relative to the opportunity set available offshore.
“For example, if you’re sitting with a South African portfolio of equities and want to buy offshore equities, you need to consider the relative valuation of South African equities versus offshore equities. I think both are fairly fully valued at the moment. It’s not like 2009 when offshore equities were so cheap and it was a no-brainer to buy them.”
While it is easy to scoff at investors’ anxiety over protecting their wealth when uncertainty rules, there is a clear case for them to diversify their portfolios by looking offshore.
Given the rand’s comeback this year, now may be as good a time as any.
Hugo says this should be a considered decision that takes into account more than the current valuation of the currency.
“We have definitely seen increased demand and questions regarding going offshore and many clients have done so,” he says. “We have tried to give clients the facts and advise them to not consider this only when the rand blows up.
“I think clients definitely do need offshore exposure to assist them to achieve the ideal risk-adjusted return they require, the level of which will depend on the individual client. If you’ve gone through a process to determine that you need some percentage of offshore exposure
Adopting a long-term approach to any investment diminishes the risk of making bad calls
and you’re significantly beneath that, you can then plan for what the best strategy is to get to that level.
“You could phase that over a number of months or years or do it in one shot, and that depends on the risk tolerance of the client.”
The merits of including offshore assets in an investment portfolio are mainly the strong diversification benefits which, as Hugo points out, is not only about the exchange rate, though that is currently a compelling case all on its own.
Warren Ingram of wealth management firm Galileo Capital argues that the level of offshore assets should be as high as 50% of an investor’s total portfolio.
“The decision to go offshore should be a long-term, strategic one,” he says. “It makes rational sense for South Africans to have a quarter to half of their assets invested overseas. The reason for this is that the value of the South African stock market and economy are less than 2% of the world, so having 50% of all investments in an economy that makes up less than 2% of the world economy, to my mind, amounts to concentration risk.
“If you believe diversification is the rational thing to do, then having the bulk of your investments locally is not truly diversification.”
Like Hugo, he advises investors to phase in their offshore exposure. This diminishes their risk if the rand strengthens unexpectedly, which could contribute to short-term loss of value.
This point illustrates the enormous uncertainty that dominates any decisions that investors need to make when building up offshore assets. From the value of the currency, the relative merits of various global markets and asset classes, to the potential for geopolitical events to derail or re-ignite the global economy, there is currently no clear way forward.
“Given the complexity and interconnectedness of global markets, I think we will continue to get surprises like a Nenegate or a Brexit,” Hugo says. “It seems these one-in-100-year surprises are occurring every one or two years. So be risk-conscious when you invest or make any changes to your investment portfolio, and try to avoid making emotional changes.”
The threat for local investors is that events like the firing of finance minister Nhlanhla Nene late last year highlight the extent to which the economy and markets are at the mercy of political decisions. The local government elections have undoubtedly boosted confidence levels, though national elections in 2019 and the impending creditrating decision still weigh heavily on the minds of investors.
Of course, local investors can gain offshore exposure through multiple routes. Apart from externalising cash or investing directly in global markets, they have a raft of globally focused unit trust funds and exchange traded funds available to diversify their assets away from local opportunities.
Hugo, naturally, points to unit trusts as an obvious way to do so. He argues that asset managers are best placed to identify opportunities across asset classes and geographies that can deliver decent returns. Investing in a fund also lowers concentration risk that would be the case if investing directly in specific markets or stocks.
“For the general retail investor, I think unit trusts are a fairly good mechanism to invest. They are well regulated and protected, and managed by expert teams. Find the ones you think align with your investment strategy, speak to them, then stick with them. Find someone whose investment philosophy matches what you want.
“Typically you can get offshore exposure by investing in rand-denominated vehicles like unit trusts that still give you 100% offshore exposure to a selected combination of asset classes, or you can go the other route and properly externalise your money. All of that has implications in terms of costs, tax and estate planning, so it is quite important to consider individual circumstances.”
He adds that adopting a long-term approach to any investment — local or offshore — also diminishes the risk of making bad, emotionally driven investment calls.
“In my experience, if you avoid the big mistakes, and you can avoid two or three big mistakes over your lifetime, you will probably do a lot better than any great opportunity you can find. And from a probability point of view it should be much easier to achieve that with a disciplined investment process.”
Sage advice indeed, and a level of prudence that many investors may wish for if they felt panicked by the rand’s demise in the early part of this year and moved money offshore.