Offshore investments: Open for business

By Trevor Garvin

There have been many headlines in the national newspapers and financial magazines commenting on the current South African political climate as well as the numerous headwinds that both the country and the world are facing from an economic perspective. Several journalists and commentators forecast global doom and gloom while others sketch a scenario that this is possibly the time of great investment opportunity and future returns. It is near impossible to be able to forecast with any degree of certainty what the future holds in terms of investment returns, but we do know the following core prudent investment principles should ideally always be taken into consideration:

  • Diversification is a good thing. Diversifying one’s assets both domestically and globally brings benefits to one’s overall portfolio and results in improved risk adjusted returns over the long term; 
  • Diversification across asset classes (both domestic and global) provides risk benefits. Spread one’s investments across equities, fixed income, property and cash; 
  • Investing into asset classes and underlying securities that from a valuation perspective are ‘cheap’ compared to their long-term averages results in higher than average expected future returns when compared to investing into more expensively priced assets; 
  • The South African rand is a volatile currency and very often tends to ‘over-react’ in both directions – appreciation or depreciation to either positive or negative market news. It is one of the most liquid currencies globally and the most traded emerging market currency. Rand movements can have a material effect on one’s rand investment returns and therefore one needs to be cognisant of currency movements.

Whenever there are large movements in the South African rand coupled with controversial events on the political landscape we, as money managers, generally face a consistent set of questions:

  • Is the country going to collapse and should we be taking all our money offshore? 
  • Given the rand has weakened so much, is it too late to take money offshore? 
  • How much money should we take offshore for investors?

Our replies are normally consistent.

  • Stick to the basic principles of investing as set out above.
  • Pessimists have been predicting the collapse of the South African economy for decades and we should remind ourselves that the Johannesburg Stock Exchange was one of the best performing stock markets in the world measured in both South African rands and US dollar terms for the past decade. 
  • There will always be several excellently run businesses with fantastic growth prospects and management who allocate capital efficiently both domestically and internationally. These businesses when identified will provide one with investment opportunities. 
  • Valuation drives investment returns over the long term. Look for pockets of value to drive performance. 
  • Predicting currency movements is extremely difficult, especially getting it right on a consistent basis. Ensure one has a well-diversified portfolio with both domestic and offshore exposure – what the exact split should be is very difficult to say as it is largely dependent on that particular investors own specific circumstances and requirements.

The graph below plots the exchange rate between the US dollar and the South African rand over the past 15 years. The rand has depreciated from R6/$1 in 2000 to the current rate of approximately R14.50/$1. Economic theory tells us that the rand should depreciate annually by the inflation differential between the two countries in order to keep purchasing power in parity. Research shows that over time this is generally the case but certainly not in a consistent or straight line manner. The South African rand goes through extended periods of strength and weakness and very often moves in a quick and extreme manner. The past 12 months have been a very good example of this, exacerbated by the political upheaval in the country.

Prudent investors should be assessing their investment portfolios with their financial advisors on an annual basis at least. Discussions should be had in terms of one’s overall investment portfolio and whether one’s offshore exposure is sufficient from a diversification perspective. The current exchange rate of the rand should be just one of the factors that you take into consideration, along with valuation, diversification and personal circumstances.

Nedgroup Investments has a comprehensive range of risk profiled unit trusts that provide one with global exposure. These can be accessed by investing either in rands via our rand-denominated feeder funds range or alternatively by investing in our Irish-domiciled US dollar or British pound range with one’s foreign allowance money.

Importantly, all Nedgroup Investments’ funds are open for new investments and we still have a material amount of capacity for offshore flows via our rand feeder fund range.

The Nedgroup Investments global fund range offers every investor simple, effective solutions to meet their global needs across the full risk spectrum. The diagram below sets out our three actively managed funds across the relevant risk versus return spectrum.