As we commemorate our heritage as South Africans this weekend, it’s worth preparing for the likely braai-side conversation about moving assets offshore. Whatever people are saying, deciding to move your money offshore should be approached as unemotionally as possible. It should also take into account a wide array of factors … including the fact that you are not assured of better returns overseas.
Living in South Africa often feels uncomfortable, the relentless reporting of our failures and differences creates a sense of impermanence, as though the weight of historical injustices and their socio-economic legacy will eventually crush us.
Investors are further unnerved by the volatility of the rand and our government debt being relegated to “junk” status. They baulk at the idea of the Reserve Bank losing its independence, or re-introducing prescribed assets in pension funds.
State employees stress that the government will squander their pension savings propping up inefficient state-owned companies, such as Eskom and SAA. Blue collar workers see compulsory preservation as a nationalisation of their benefits. Everybody’s worried about something.
But moving money abroad should be about more than just a bet against the country. As with all your investing decisions, it should be approached as unemotionally as possible and take into account a wide array of factors.
Many are tempted to invest overseas simply to improve return. Factoring in the kicker from inevitable rand weakness, they expect to do a lot better than in the local market.
Except they wouldn’t have in the past. Over five or ten years, local and international returns vary, but longer term, the two converge; in rand, the long-term real (after inflation) return of the JSE All Share Index has been around 7% pa, for international shares it is around 6.5%.
That may change in the future – nobody knows – but there’s a strong argument it won’t. The reason is that, ultimately, everything comes out in the wash. The long-term weakness of the rand against, say, the US dollar, is indicative of the inflation differential between the two countries.
For example, since the beginning of 1990, the rand has lost, on average, 5.7% pa against the US dollar; the inflation differential is about 5%.
But long term, the share market is also an inflation hedge: the rising price of goods and services ultimately reflects in inflationary revenue growth and share price appreciation. Higher local inflation eventually translates into higher nominal growth for our shares.
Return expectations aside, you should match your assets to your liabilities. If you foresee a major expense in another currency then yes, build an asset in that currency. If you hope to emigrate or retire overseas, or plan a foreign education for your children, you won’t want the exchange rate sabotaging your goal at a future date.
This also offsets “regulatory risk” since our exchange control laws are not set in stone and future restrictions might interfere with your plans.
By transferring your money abroad at regular intervals, you can reduce your forex “timing risk”. Use a rules-based strategy because there is just no way to predict what the rand will do next. An intuitive approach can see you lock in an unfavourable exchange rate, or lead you to forgo a rate that will look like a bargain next year.
But rarely do people take money out of the country for a defined purpose. Rather, they see it as “insurance”. If you believe that South Africa will turn into a “failed state”, then do move your discretionary financial assets to a safe-haven. But know that, on average, this type of insurance is a losing proposition – it usually costs more than it pays.
Currency diversification is important, but so is re-balancing your portfolio
Of course, it is good to spread your investments far and wide so they aren’t all at the mercy of one unfavourable development. Not just across securities, but also across industries, asset classes, currencies and geographies.
As our share market is quite narrow (160 or so investable shares) and the size of a few dominant counters presents concentration risk, it makes sense to include offshore equities in your portfolio. This also gives access to key growth sectors such as Tech, Biotech and Pharma, which are underrepresented locally.
But to reap the full benefit, you need to rebalance regularly. In the context of your overall portfolio, rebalancing requires you to sell some of the investments that have done well (locking in profit) and buy more of the laggards (locking in value). Invariably, this will require you to buy rand after rand weakness and sell after a recovery. At these junctures, our inclination is usually to do the opposite or nothing at all. From that perspective, relocating your money offshore is then not optimal.
Fortunately, you don’t need to do that to achieve currency diversification. The JSE is home to numerous secondary listings of international companies, and to shares that earn at least some of their revenues in foreign currencies. Almost half the total earnings of JSE-listed companies benefit from a softer rand. By owning the local market, you are already partially hedged against rand weakness.
Also, your retirement fund probably makes full use of the 25% offshore allocation permitted by the Reserve Bank. Plenty of multi-asset unit trust funds do the same. This convenient short-cut helps you avoid the administrative headache of investing abroad yourself, it’s probably cheaper, and it comes with disciplined re-balancing. And your offshore investment allowance is not affected.
If you want more than 25% offshore exposure, a local low-cost international index tracker will give you quick, low-cost access to those markets, again not at the expense of your offshore allowance. As an added plus, you won’t immobilise your money – you won’t have the same qualms about cashing out you would if you transferred your money overseas.
Rather than viewing such a move in isolation, act in the context of your life’s objectives and your overall portfolio. The normal rules apply: invest with the goal in mind; keep it simple; look for a low-cost solution; don’t play at market timing, and optimise your outcome by occasionally rebalancing. Above all, use the official channels, so that you can manoeuvre freely, and sleep easy.
Steven Nathan is CEO of 10X Investments.