While investors accept that there are compelling reasons for investing offshore: diversification benefits; access to asset classes, industries and companies not available in South Africa; reduced emerging market and SA-specific risk; and maintenance of ‘hard’ currency spending power, they tend to spend an inordinate amount of time trying to call the direction of the currency.
Over the longer term, the performance of the rand contributes to an offshore investment’s overall rand return. Rand depreciation adds to the offshore investment’s total return calculated in rands, and rand appreciation detracts from the overall return. Figure 1 shows that over rolling 5-year periods, the rand has experienced periods of both depreciation (81% of the time) and appreciation (only 19% of the time) against the US dollar. On average, however, the rand has depreciated by approximately 6% per annum over rolling 5-year periods, over the last 22 years.
Figure 1: Rolling 5-year performance of the rand (January 2000 – December 2022)
Source: Morningstar, as at 31 December 2022.
Many investors are fixated on the exchange rate when making an offshore investment. We therefore analysed the performance of the Ninety One Global Franchise Fund from April 20071 to December 2022 to determine whether the movement of the rand/dollar exchange rate (i.e. whether it appreciated or depreciated) in the year prior to an initial investment matters. Note that we used the 12 months prior as a proxy for investors’ views on where the rand/dollar exchange rate is likely to move in future.
The analysis split the data into two series:
The investments allocated to either of the two series are then held from their respective inception dates to 31 December 2022. The annualised results are summarised in Figure 2.
Figure 2: Performance of the Ninety One Global Franchise Fund following periods of rand weakness and rand strength
Source: Morningstar and Ninety One, various dates to 31 December 2022. Performance is based on a lump sum investment, NAV to NAV net of fees, gross income reinvested. For illustrative purposes only.
The rand tends to be a risk-on/risk-off currency (i.e. a cyclical asset). Simplistically, in a risk-on environment, investors switch exposure from developed markets (DMs) to emerging markets (EMs), depressing DM asset prices and strengthening EM asset prices and currencies like the rand. In a risk-off environment, the reverse is true, with investors moving their allocation back to DM assets, resulting in a weakening rand, which then acts as a ‘shock absorber’ for an offshore investment.
So, what the rand may give you in terms of a potential offshore investment entry point, offshore asset valuations (and asset price momentum) tend to take away, and vice versa.
When investing offshore, we would therefore argue that investors take a longer-term view and look past the shorter-term movements of the currency. Furthermore, the majority of South Africans investing offshore should look to global equities or high-equity global multi-asset solutions with long-term track records that have proven their mettle through investment cycles, such as the Ninety One Global Franchise and Ninety One Global Strategic Managed Funds.
Interestingly, Clyde Rossouw, Portfolio Manager of the Ninety One Opportunity and Ninety One Global Franchise Funds, continues to favour select global equities despite the expected slowdown in global growth:
This talks to the benefit of paying attention to the offshore assets selected rather than the currency.
Finally, to make a discretionary offshore investment more tax efficient, investors should consider investing in an offshore unit trust via the Ninety One Global Life Portfolio, available on the Ninety One Investment Platform.
The Ninety One Global Life Portfolio offers investors, subject to high tax rates, a significant reduction in the rates of tax applicable to their investment. In addition, Ninety One Assurance Limited takes care of all tax administration by undertaking the calculation and payment of any tax due. This is possible because a sinking fund is taxed in terms of the five funds approach, which means the policyholder fund is the taxpayer and not the end investor.
The result being that all tax is deducted within the sinking fund policy, and the following rates apply: 3
The proceeds, when received, are tax-free in terms of current revenue practice. And importantly, in the event of the death of the policyholder, no capital gains tax is payable when the policy is transferred into the name of the beneficiary.
As always, the best approach is to seek professional financial and tax advice.
1 Fund launch date: 4 July 2009. Performance is based on the UK-domiciled Global Select Equity Fund from 10 April 2007 which
then merged into the Luxembourg-domiciled Global Franchise Fund on 4 July 2009. Performance prior to 4 July 2009 has
been simulated.
2 Ninety One Opportunity Fund Manager commentary, as at 31 December 2022.
3 Applicable to the 2022/2023 tax year. Taxed in the individual policyholder fund.