Taking Stock Summer 2023

Does the exchange rate really matter when investing offshore for the longer term?

Many SA investors are fixated on the exchange rate when making an offshore investment. Here’s why it matters less than you think.

21 Feb 2023

7 minutes

Sangeeth Sewnath
Paul Hutchinson

The fast view

  • There are compelling reasons for investing offshore; however, many investors fixate on trying to time the currency.
  • On average, the rand has depreciated by approximately 6% p.a. over rolling 5-year periods, contributing to an offshore investment’s overall rand return.
  • Our analysis illustrates that the rand/dollar exchange rate at the time of initial investment (i.e. whether the rand had appreciated or depreciated over the preceding year, used as a proxy for investors’ perception of where the currency will go) does not make a material difference to the overall longer-term return of an offshore investment.
  • When investing offshore, investors should take a longer-term view and look past the shorter-term movements in the currency.
  • Where you choose to invest offshore is therefore more important than the shorter-term movements in the currency.

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)

Rolling 5-year performance of the rand (January 2000 – December 2022)

Source: Morningstar, as at 31 December 2022.

Timing the currency, does it matter over the longer term?

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:

  • Series 1: periods where the rand was stronger in the year preceding when an investment into the fund was made, continued rand strength being what investors are concerned about and attempting to avoid
  • Series 2: periods where the rand was weaker in the year preceding when an investment into the fund was made, continued rand weakness being what investors are trying to benefit from

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

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.

Some key observations:

  • Of the 165 1-year periods, 56 (or approximately one-third) were periods where the rand strengthened and 109 (approximately two-thirds) where the rand weakened (this outcome should not be unexpected).
  • The average annualised return was similar for periods of rand strength (13.1% p.a.) and rand weakness (12.3% p.a.).
    • Many investors would have expected a lower return for investments made following periods of rand strength, but they forget that the performance of the hard currency asset also matters.
    • This result suggests that the exchange rate entry point is not as material a consideration as many investors may think.
  • The maximum annual return was also very similar (18.2% for periods when investments were made following rand strength and 17.5% when it weakened).
    • Again, many would have expected more material outperformance for investments made following periods of rand weakness.
  • The difference in the minimum annual return was more meaningful. But even at -6% following a period of rand strength, this is not a significantly negative number or cause for concern for a growth-oriented investor. The minimum return following a period of rand weakness was -12.3%. This is somewhat surprising but coinciding with the 2022 bear market in global equities, where the MSCI All Country World Index was down 18.4% (US dollar). So, even though the rand depreciated by more than 6% against the dollar over the year, it could not protect investors fully from the collapse in global equity prices.

Why this may be the case

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:

“While 2022 was undoubtedly a tough year for investors, the fall in asset prices resulted in improved prospective return expectations. This is especially true for the high-quality global companies we hold. Despite the fall in their share prices, the fundamentals of these businesses remain strong. They are ideally positioned to navigate the tough macroeconomic environment that lies ahead. Their strong pricing power and low debt levels are a formidable bulwark against inflation and rising interest rates. We remain confident about the runway for growth and the ability of these companies to compound their cash flows. Given these factors, we are increasingly optimistic about the prospective returns from the global equities we hold. Global equity remains our preferred asset class.” 2

This talks to the benefit of paying attention to the offshore assets selected rather than the currency.

The benefits of making use of the Ninety One Global Life Portfolio

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 proceeds, when received, are tax-free in terms of current revenue practice.

The result being that all tax is deducted within the sinking fund policy, and the following rates apply: 3

  • 30% on income (if any), rather than the investor’s marginal tax rate, which may be a maximum of 45%
  • 12% on capital gains (40% inclusion rate x 30% income tax rate), rather than a maximum effective rate of 18% (inclusion rate of 40% taxed at the investor’s marginal tax rate, which may be as much as 45%)

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.


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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.

Authored by

Sangeeth Sewnath
Managing Director, Americas
Paul Hutchinson
Sales Manager

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