It’s not too late to invest offshore

‘Offshore exposure should be a part of any well-balanced investment portfolio, regardless of the rand’s value’ – Duane Gilbert.

Fund managers are very much aware of the impact of the weaker rand on investments, but for consumers not dealing with asset management on a daily basis it is a huge concern.

Apart from the economic implications, they should worry about the possible effect on their investments and how their savings can be protected against further weakening. Especially as economists predict that further weakness could be in the channel for 2016 and 2017.

According to Duane Gilbert, head of research at Sygnia Asset Management, the answer lies in offshore diversification. But first, you also need to understand why the exchange rate has depreciated so significantly over the past four years.

“The rand’s current weakness has its roots in the financial crisis of 2008 and 2009. At the time the developed world focused on liquidity expansion to recapitalise their banking systems and to stimulate economic activity. The unintended consequence was that money left their economies and investors flooded into emerging markets, which offered high interest rates.

“Most emerging countries experienced this and their currencies became stronger. With the help of the resources boom in China, the rand strengthened between 2009 and 2011 to around R7 against the US dollar.”

However, since then the picture has changed quite a lot. Gilbert explains that domestic issues such as the electricity crisis, trade deficit, budget deficit and labour unrest as well as the fact that we couldn’t get the economy to grow at the rate it needed to, weighed heavily on sentiment. At global level the developed countries gained economic muscle, while the Chinese economy slumped.

The results for South Africa were, amongst other concerns, the continuous outflow of foreign investment and the relentless depreciation of the rand against major currencies, particularly the US dollar.

“As the rand weakens fund managers lean towards rand hedge stocks. Investors having discretionary money to invest, should ensure that a chunk of it has offshore exposure. Offshore investments can increase the value of your investment in rand terms if the currency declines,” he says.

For each individual the extent of exposure and risk they can tolerate depends on their particular situation, investment goals and the type of investments they choose. They should discuss their offshore diversification with a qualified adviser or fund manager to ensure it matches their risk profile.

Gilbert says one of the easiest routes to get offshore exposure is by investing in a global unit trust, such as the Sygnia International Flexible Fund of Funds. It is actively managed for the maximisation of long-term returns and offers exposure across different sectors and a diverse geographical spread.

“In the next month or two Sygnia will also launch the Skeleton Global Equity Fund, which gives investors exposure to offshore equities. This low-cost offering is quite exciting compared to expensive fund management in the global space.”

In terms of Regulation 28, retirement funds should already have some offshore exposure. This exposure is limited to 25% to ensure that no unnecessary risks are taken with retirement money. Depending on their risk profile, Gilberts suggests that investors who are saving for the long term and want to boost their offshore exposure can also do it through an additional vehicle like a unit trust.

Although November saw some strengthening of the rand after the South African Reserve Bank announced an increase of 25 basis points in the repo rate, he believes that the rand is far from growing significantly stronger any time soon.

The expected decision of the US Federal Reserve to increase the prime lending rate early next year and a possible downgrade of South Africa by rating agencies looms ahead. If South Africa is downgraded it could trigger further capital outflows.

“Furthermore, investors should not stay clear from offshore diversification as a result of trying to time the market and wait for the rand to strengthen before investing. The adage that time in the market is more important than timing the market still holds true. Offshore exposure should in fact be a part of any well-balanced investment portfolio, regardless of [the rand’s] value.

“South Africa represents less than 1% of the global economy and it always makes sense to have global exposure. If you focus just on local investments, you are missing out on major investment opportunities that can be found in global industries not available in South Africa,” Gilbert says.