WAIT IT OUT

New rand strength bites peo­ple who were over-hasty in mov­ing their money over­seas, writes Jo­hann Barnard

Financial Mail - Investors Monthly - - Contents -

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.

War­ren In­gram of Galileo Cap­i­tal

Pru­den­tial Unit Trusts MD Pi­eter Hugo

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