I vividly recall attending an investor feedback session with a hotshot offshore manager whose fund had performed terribly. After taking some criticism from the hostile audience he totally lost it, raising his voice he stated that “it was only numbers”. Of course, it was not only numbers to the investors whose had lost money, they felt the pain that comes with investment losses. But sometimes it is just numbers, particularly when reviewing performance over short periods.
I wrote an article late last year on the ANC elective conference highlighting that fact that should Cyril be elected as the ANC president that this could lead to a strengthening of the Rand in anticipation of positive changes to come, which is exactly how it has played out. The Rand has strengthened materially from pre-election levels of around R14 to just below R12 at the time of writing.
The currency strengthening cannot solely be ascribed to the political developments in SA but has much to do with high expectations for global economic growth in 2018, which is driving investment into emerging / commodity markets.
For SA investors who have offshore exposure via asset swop funds the Rand strengthening translates into Rand losses. Please refer the table below, which illustrates the affect of the reporting currency on short-term returns. Keep in mind that SA pension funds are invested 25% offshore via asset swops.
To make my point I have assumed no growth over the period, the % returns highlighted in yellow are simply the currency movement. If the investor measures his / her wealth in Rands then it looks like the election of Cyril and the subsequent rand strengthening resulted in an -7% capital loss. However, if the investor translates his / her wealth into dollars they are in affect +8% wealthier in global terms.
If you are getting confused don’t worry. Very simply had the ex-wife NZD been elected the rand would most likely be sitting at R17/$, which would have pushed up investments in Rands, but we would have been significantly poorer in dollar terms and ultimately this would have resulted in soaring inflation and a huge step in the wrong direction of our Northern neighbour.
Investors should look through the affect of the Rand strengthening on the offshore component of their portfolio’s in the knowledge that we have hopefully stepped back from becoming a banana republic. There is a lot to be done and the jury is still out whether Cyril has enough support within the ANC to implement the changes required to restore our reputation as the Rainbow Nation. Try not worry about short-term performance on the basis that “it is only numbers”.
Mcomm, CFP®, HdipTax
T. 021-851 3746