With the local equity market having had a spectacular run, fund managers believe that the developed offshore markets are offering better value for South African investors.
But investing offshore does not mean that you have to go through the whole hassle of getting permission from the Reserve Bank to use your R2-million foreign investment allowance. There are a myriad rand-denominated funds that invest offshore using the fund manager’s investment allowance.
Tobie van Heerden, Investec Asset Management marketing director, says it is more practical to invest in a rand-denominated fund as these funds are directly correlated to an offshore fund and the investor gets exposure both to the offshore markets and currency movements.
The reason for investing offshore is for diversification and relative valuation, both of which can be achieved by investing in a rand-denominated fund.
But, Van Heerden says the downside to rand-denominated global funds is that the range is fairly limited to vanilla, run-of-the-mill equity and balanced funds, as some of the spicier funds are not Financial Services Board approved, especially if they have hedge fund exposure.
“This may be a worthwhile option for a more sophisticated investor who wants exposure to a wider range of asset classes,” says Van Heerden. He says investors who wish to hold funds offshore, but are concerned about short-term currency volatility, can invest immediately in the rand-denominated fund, while waiting for Reserve Bank approval, at which stage they can move the investment to the offshore fund.
Van Heerden says that if you have money offshore already, use a South African fund manager that invests globally because it will be far more accessible and will report your returns in line with South African tax practices.
Currency futurespays off
Currency futures have just been listed on the JSE’s YieldX and offer retail clients an opportunity to take positions on the rand. Kurt Pagel, of Standard Bank Online Share Trading, says retail clients can speculate or hedge against currency movements.
As a speculative bet, you can buy the currency future if you believe the rand is about to weaken. On the flip side, you can go short or sell the future if you believe the rand is about to strengthen.
Pagel says the instrument can be used as a hedge if you have dollar expenses in the future. For example, if you are going overseas in December, but you can take out your foreign currency only two weeks before you travel, you can purchase the currency future and, if the rand depreciates, the profit you would have made on the future will offset the additional rands you will be paying for the same dollar.
The beauty of trading futures is that you pay only a margin to get a full exposure to the currency. At the moment, the currency futures are trading at 15 times their margin. What that means is that you pay 6,45% of your total exposure. So, for example, if you wanted to have $10 000 (R72 000) worth of exposure at an exchange rate of R7,20 you would have to pay only R690.
If the rand fell to R7,50 by December, your dollar exposure in rands is now R75 000 and you have made a profit of R3 000, which directly compensates the extra amount you now have to pay for the same amount of dollars when going on holiday.