Ramaphoria is no reason to abandon your offshore investment strategy16th April 2018
After eight years of continued weakness the Rand is back on the front foot. The local currency has been one of the best performers against the Dollar this year and is currently trading near levels last seen in mid-2015.
While the strengthening trend has lost some steam in recent weeks, the momentum appears to be in the Rand’s favour. Suddenly people with significant offshore allocations are beginning to ask whether they should be repatriating capital before the Rand strengthens further. After all, as recently as 2012 the Rand was trading below eight to the Dollar.
History has shown that South Africans tend to respond to currency volatility with emotion rather than logic, taking money offshore during a weakening phase and repatriating wealth when the Rand is in recovery mode. However, we at Stonewood Capital believe the correct strategy to build an offshore portfolio should be based on doing the opposite of what your emotions are telling you to do. As advisors to high net worth individuals and families we have always advocated for an offshore capital allocation strategy based on consistency rather than timing.
If you have an amount of say R12m that you’d like to send offshore you’d be better off taking out R1m a month rather than trying to time the market by attempting to pick the best point in time to externalise the entire amount. You may be lucky and time the market correctly but more often than not you’re going to be left disappointed. If anything you want to ignore short term fluctuations in the Rand. By consistently externalising portions of your capital you are effectively taking money out at the average exchange rate anyway, which by extension means you are smoothing out the impact of short-term currency volatility.
Another mistake that South Africans make all too frequently is to assess the value of their offshore portfolios in Rand terms. If your offshore portfolio is in Dollars then you should benchmark your returns in Dollars as well. Continuously looking at your offshore returns in Rand terms is a recipe for poor decision making.
Stonewood is not in the game of vanilla portfolio construction, which involves setting up an asset allocation strategy and then finding investments within those allocations. We assist our clients, many of whom are sophisticated investors in their own right, by finding the most suitable investments, in assets classes they’re comfortable with, to maximise returns relative to the risks they’re prepared to take. A key thing to remember here is that return is not always indicative of risk. Sometimes a lower return can mask hidden costs as well as risks. For example, a German property with a blue chip tenant offering an 8% return over five years may look great on paper but when you dig deeper you might find all is not what it seems. You may find that the property is located in an unfashionable part of a major city where its status as a sought-after location is deteriorating. The blue chip tenant may decide not to renew their lease or in some cases shut shop altogether in that area (e.g. a retailer), leaving you without a tenant.
When it comes to offshore investing you need to look beyond the document you’ve been given. You can’t just rely on gut instinct or blind faith when investing in an unfamiliar location. That’s why getting involved in your investment is so important. Time and again we see that disappointment often stems from not being involved in an investment and fully understanding the risk return relationship from the outset. We often tell our clients that if they have a good use for their capital within South Africa they should rather deploy the capital locally as they are more likely to be involved in its management.
However, if you are trying to preserve capital which you have already created for the long-term and you don’t have a tangible local investment opportunity into which that capital can be deployed, then your best bet is to look offshore. If you want to build a truly global portfolio you simply have to look abroad. You can’t have an 80% or 90% allocation to South Africa with 10% to 20% abroad and think you are globally diversified. No globally diversified investor would have such a large allocation to emerging markets in general, never mind South Africa alone.
While South Africa’s economic growth outlook has improved somewhat we still believe that the rand has a long-term weakening bias, thanks to the country’s persistent twin deficits (current account and fiscal deficit). A strategic offshore wealth allocation is therefore critical to ensuring long-term wealth preservation in a global reference currency. So enjoy the Ramaphoria while it lasts, but continue to build your offshore portfolio and do so consistently rather than opportunistically.