It is hard to ignore the rand and its movements relative to global currencies. Its performance seems linked to our national psyche, and it is one lens through which the world sees South Africa. While a weak rand is good for exporters and tourism, for South African investors, it means that foreign investments become more expensive. Local investors benefit from savings and investments already abroad, but the decision of when to invest additional money offshore becomes more complicated (and expensive).
Ten years ago, one US dollar cost you roughly R10; today it costs you close to R20. But we are not alone – many currencies have weakened relative to the US dollar over the last decade. For instance, 10 years ago, one US dollar bought you roughly ¥100; today it buys you ¥155.
Currency movements are notoriously difficult to forecast in the short term. There are just too many factors at play – from the mood and actions of politicians to foreign investor sentiment, and the daily noise in global markets. Global markets themselves are unpredictable, so even if we could pinpoint what our currency was going to do next, there would be no telling if the right opportunities would be available offshore at that exact point in time. Indeed, the current geopolitical situation is adding further complexity to investment decisions.
A better strategy is to figure out how much of your investment portfolio you want to place offshore, and what you are trying to achieve, and then formulate a plan to invest as regularly as possible in carefully selected assets. Arguably, it is more important to spend your time identifying which global assets you want to invest in for the long term, than trying to determine the perfect entry point. Over the long term, having exposure to currencies, industries and opportunities outside South Africa allows you to participate in a more diversified return, and reduces your risk exposure to any one particular variable.
The returns you ultimately enjoy in our funds are the result of our portfolio managers’ decisions, as well as your ability to stay the course.
There is an offshore flavour to this month’s Quarterly Commentary, with Horacia Naidoo-McCarthy delving further into the reasons why investing consistently offshore is good for your overall investment strategy – although it is also important to confront the risks and to make sure you have a clear understanding of your chosen offshore manager’s investment philosophy and approach.
Once you have decided to diversify your portfolio in this way, the next question is how to invest offshore. Julie Campbell tackles this topic, taking us through the options, with the emphasis on the newly launched Allan Gray Offshore Endowment.
While endowments are quite complex products to understand, they offer tax and estate-planning benefits, and may be well suited for you if your marginal tax rate is higher than 30% and you would like to invest and be paid out in foreign currency. Our offshore endowment has been designed to provide more flexibility than traditional endowment products, and offers a range of offshore funds similar to those on our offshore investment platform.
Identifying investment opportunities
Understanding your investment manager’s approach, and how it is implemented, is key to knowing what to expect on your investment journey. The returns you ultimately enjoy in our funds are the result of our portfolio managers’ decisions, as well as your ability to stay the course.
Since the offshore investment limits were increased in 2022, we have taken advantage of this additional flexibility by increasing our exposure to the Orbis funds and through our portfolio managers managing a portion of the offshore component directly. Our approach is focused on managing the portfolio holistically. Our investment articles this quarter showcase our offshore thinking. One example is The Walt Disney Company, a position initiated by the Allan Gray team. Duncan Artus and Siphesihle Zwane outline the investment case.
Within the Orbis Global Equity Fund, half of the portfolio is invested in US shares the Orbis investment team finds attractive. This is relatively low considering the US stock market represents about 70% of the FTSE World and MSCI World indices. The reason is simple: Orbis is finding fewer opportunities in the US market, and the shares they like are quite different from those currently in favour. Povilas Dapkevicius and Matteo Sbalzarini take us through Orbis’ investment theses on two managed care organisations, namely UnitedHealth Group and Elevance Health.
Despite its flourishing market, the US government has dug itself into a debt hole, once again reflecting that market returns and economic indicators are uncorrelated. With spending being its go-to solution for most problems in the US, it is unclear how the situation will be resolved. Thalia Petousis looks at why the current trajectory of debt is unsustainable.
Getting perspective
As a local investor, you may be thinking that US debt is the least of your concerns. However, it is commonly understood that when the US sneezes, the rest of the world catches a cold; economic uncertainty in the world’s biggest economy has a global knock-on impact.
Global uncertainty is simply adding to the angst as pivotal local elections approach. We have no special insight into what may transpire and continue to consider various outcomes when constructing portfolios for long-term returns. It is important to keep perspective throughout your financial journey to navigate market volatility. Drawing on history, Marise Bester explains that we cannot control or predict the external environment, but we can be mindful of our own behaviour and emotions, particularly during uncertain times.
Retirement fund system changes
I want to remind all of you who are retirement fund members that South Africa’s retirement savings system is set to change on 1 September 2024. Jaya Leibowitz aims to simplify and explain the intention and mechanics of the so-called two-pot system, which essentially makes a portion of your retirement fund savings available to you before retirement.
It is critical to understand that go-live of this new system hinges on many factors, including the regulations being finalised and signed by the president, the Financial Sector Conduct Authority being able to timeously approve fund rule changes, the South African Revenue Service being able to issue tax directives for savings withdrawal benefits, and service providers’ readiness.
The allowance to withdraw a limited portion of your retirement savings will undoubtedly go a long way to help those who are in dire straits, especially if other avenues of funding have been exhausted. An important first step in one’s long-term investment plan should always be a cash emergency fund that is readily available. This should enable you to, where possible, preserve your retirement funds for their intended long-term purpose – to allow you to retire comfortably.
Thank you for your ongoing trust.