If you are disappointed with returns from your investment portfolio over the last quarter, then that probably means you have a well-diversified strategy with plenty of exposure offshore. If that’s the case, then you shouldn’t worry too much about the short-term returns.
Please see below the performance of the Investec Global Franchise Fund, which I am using as a proxy to illustrate the effect of the stronger rand on returns when reported in Rands. The feeder fund is fully invested in the offshore fund, but reports returns in Rands and not dollars i.e. the same investment fund, only the reporting currency differs.
As you can see the strong dollar returns for the years 2015-2017 look terrible when converted back into Rands. Conversely the weak dollar investment returns from 2013-2015 look great when reported in Rands.
· The decision to overweight offshore was correct given the political risk we faced at year-end, bear in mind how close we came to Armageddon. It came down to a difference of only 179 votes in favour of Cyril over NZD and a slippery slope to bankruptcy
· The decision to maintain an offshore overweight position is still appropriate given the structural issues and ongoing risks, which have not gone away
· SA is less than 0.4% of the global economy, it makes sense to have offshore exposure notwithstanding the effect of the currency on short-term volatility particularly when reported in Rands
· The stronger rand is a vote of confidence in SA and although intuitively we would feel better with higher rand returns fueled by a weak currency this would be a false indicator. Consider Zim and / or Venezuela where the stock market returns 1000%+ on the back of a collapsing currency and hyperinflation, no good being a zillionaire in zim dollars or peso’s, which are worthless
What has exacerbated the effect of the strong rand is the fact that 2/3rds of the JSE generates earnings from overseas, this has seen foreign earnings come under pressure when translated back into Rands, thus holding back the dual listed / rand hedge share prices.
The question is bearing risk and return in mind, would you rather invest in a global business like British American Tobacco or a local retailer like Mr Price, knowing what you know about the local economy and ongoing political / socio-economic risks we face. Hate to sound negative on SA, but from an investment and particularly risk perspective offshore investing is still appropriate offering a better risk adjusted return for long-term investors.
I am concerned the “Ramaphoria” affect, which has seen foreign inflows driving the Rand, bond market and local retail / banking shares may be a little over-optimistic in their anticipation of a turnaround. It is going to take time.
The before mentioned should be viewed as general comments only, every client’s circumstances, objectives and personal risk appetite needs to be considered when deciding on an appropriate offshore allocation.
The key message is avoiding the kneejerk reaction of thinking something is broken that needs to be fixed. Usually a period of under-performance is followed by a period of out-performance, which brings up the averages. The trick is having the patience to wait, which is easier said than done with our emotional fight or flight instincts affecting our rational decision making.
Mcomm, CFP®, HdipTax
T. 021-851 3746