Brought to you by Pressient Investment Management . Informed by science , guided by insight , pressient Investment Management is an authorized FSP .
Welcome to another episode of Honest Money . It's kind of a special episode because you can see we're in a studio . It's big money production . I'm really grateful to have Rupert here from Pressient Investment Management joining us . Thanks so much for honoring us in this lovely studio of ours .
Thanks very much . It's always good to be back .
We need to talk about the RAND . It's kind of a topic that hits us all the time , no matter where , whether it's at home , talking to our wives , talking to our clients , talking to our investors all of us . We deal with this all the time . For me , it's a hugely emotional topic for a lot of South Africans .
I'm not sure how much attention we should be paying to it when we're actually making investment decisions .
Yeah , as you say , it's that bright conversation that you have all the time . My answer to that is you actually have to pay a lot of attention to the RAND , especially now there's a lot more offshore exposure . People are getting diversity into offshore markets . The RAND becomes ever more important .
When you do that , you're looking at retirement type products which have got almost half of their allocations offshore . When we hear the news that the RAND has blown out from 18 to 1950 , you're on the right side of that trade . If you've got the RAND exposure , you've made quite a bit of money .
But the problem is the RAND almost always , always , let's call it always , let's be quite certain around this one always comes back . I can go into a bit more detail on that one .
Let's actually hit it , because I think most of the time , if I put myself in the shoes of an average South African , I feel like we probably wake up in the morning thinking the world's going to end . Then , when we read and we see on our phones or whatever it is , that the RAND lost value against the dollar , I can almost tolerate it .
You're saying it always comes back .
Yeah , I'm going to have the same problem . I would look to book a holiday overseas and the RAND would have blown out a bit . I'll give it a week or two and then two weeks later , I actually should have done it . Then it's quite hard to time the RAND .
The thing with the RAND is that for currencies as a whole within a currency , you get paid an interest rate . That's basic .
If you were to be let's put it this way if you were a dollar-based investor , someone sitting in the United States , and you were to take money from your bank account , buy RANDs and put it with a standard bank , any group , whoever it might be , you earn your interest rate .
The thing about the RAND is that when the RAND blows out , rates generally go up because the Reserve Bank steps in and hikes rates , which we've seen , and I'm sure we've all seen this .
Our home loans have gone through the roof , which means it becomes ever more attractive for that person sitting in the United States to buy into RANDs and put their money into a risk-free or near-risk-free instrument in South Africa .
They can put it in bonds , government bonds , they can put it in bank accounts , and what that means is that there's then demand for the RAND . So people are wanting to buy the RAND , which means that the RAND comes right back to where it was . Touch wood , it almost always does .
So let's just kind of create a hypothetical , because this is a podcast . We don't know , when someone's listening to this , that the RAND is sitting at 19 RAND to the dollar and they're sitting in three hours of traffic because it's stage 72 of load shedding and all they can read about is no one's been arrested for corruption etc .
And you're sitting with relative confidence and saying the RAND will come back .
Yeah , I mean , provided the government doesn't default , which can happen , let's not be there on the bush there . That can happen . And our government is sub-investment grade . I mean that on a personal opinion , I don't think our government warrants sub-investment grade compared to other governments which are investment grade , but that's just an aside .
But provided you don't default , then there's no reason why the exchange rate shouldn't come back to where it should be . It's long-term equilibrium and the example that I give her on that is that often I'll speak to elder clients and they'll say oh , you know , the RAND has really , really gone to the dogs .
I used to be able to buy a dollar for a RAND in the 1980s and now I have to pay 19 RAND for the dollar . And there's some charts that I can't show you here , but there are charts where you can plot the RAND in real terms . So , strip-art inflation , right . The RAND is exactly the same value as it was in the 1980s compared to non-real terms .
So the journey that we take is a tough one . It's a roller coaster and that's what we always talk about at the prize , but it actually doesn't make a difference because of inflation .
So , if I remember correctly and I'm not asking you to confirm , but I think I remember when Jacob Zuma was elected as president of the ANC Polokwani , that I do remember .
But the part that I think I'm clear on is that actually the next day the RAND strengthened and there was no one not one of us was sitting here at the time going , oh he's amazing , he's going to be an incredible . We were all scared . We didn't know how bad it could get . I mean , it was a long time later that it really got known .
But the point is the RAND didn't strengthen because of Jacob Zuma getting elected . It strengthened for something outside of the rest of the world . Maybe that's the other comment is a lot of what happens is actually got nothing to do with this .
And we're actually very unfortunate when it comes to that . So right now depending on when you're listening or watching this but right now the round has blown out and it's not for anything South African specific , so there's a risk of environment around the world .
Spreads have widened around the world and the round , amongst other currencies , have sold off versus the US dollar . So we are , in essence , the victims of something completely out of our control here and that just talks towards trying to time the round . It's often something that's pretty foolish to do because you can't predict things .
You can predict certain things with a higher degree of certainty , but there's always that left tail risk where the United States invades Iran or whatever it might be , and that we just can't predict .
So trying to time your exit in and out of the round is very tough , and the way to get around that , one of the ways to get around that , is to average in and average out on the currency . You get around that massive swing .
You're not going to win them all , you're not going to lose them all , but you're going to average in and out on the currency , and that's something which I would , as the first step , look towards doing instead of just dropping one big lump sum offshore in one move .
Okay , so let's stay on that . So I win the lot . I've got a million round and I've got no money overseas . I'm listening to this and the round is 19 round to the dollar . I take my million round , I divide it up into how many chunks ? Well , you should put it all in the price imbalance for now ?
No , so you could split it up into , let's say , five chunks , six chunks the number , it's just you want to spread that away from one single single event risk . Sometimes you can't get around that single event risk though , so sometimes you're stuck .
Say , you're a corporate and you have to transfer a certain amount to pay for something right , Big contract , have to pay spot , and what a lot of corporates do in those instances is they engage in currency hedging .
So I mean , that gets relatively technical , but you know you can actually remove the path of currency and still participate in the depreciation on the round .
So I'm going to take my million . I'm going to stay on me because it's all about me now . I've just won the lot , I'm excited , so I'm going to take my million . I'm going to divide it up into five . Let's say , because the math is simple , 200,000 . Now , wait a month , 200,000 , send it out . Close my eyes .
I'm not reading the news now , worrying about the round is going to do anything up down , left right . It's going to do something . It's not going to be exactly the same . That's the only certainties . It's not going to be exactly what it is today . And then you're saying that you make your investment decision on the other side and you carry on .
However , someone sitting here and in a position where they've watched the round go from 1750 to 19 , understand that you're making a mistake . If you're now sending money out only because it's gone from 1750 to 19 , with no other strategic reason , because there is a good chance .
Whether it's next week , next year , next two years , we don't know that's the flip of the coin . Pot . Your certainty is , you are certain it comes back . You don't know that it's coming back to 1750 , but what you're saying is does come back and therefore , if your only decision is well , the round's got weak .
I'm sending money out , which happens a lot in our country with investors . That's a critical mistake . You might need to send money out to get your balance of your asset allocation . You might need a bigger offshore allocation , fine , but you don't just do it because the round weakened .
That's possibly the other round . That's exactly the wrong thing to do , right , Because the round's already weakened . So you lost the art and the potential to make that profit from weakness .
And now , given that the round generally does revert back to its long-term trend and it's quite a steady long-term trend and it does revert back to that again and again because of that arbitrage that offshore investors in particular will take advantage of by and to the rounds . So it reverts back to it and that's the risk that you've taken .
So you put your money out at 1950 , it comes back down to 18 , you've lost beyond 10% on your investment because you wanted to buy something in the United States .
Okay . So now I just want to touch on this because you brought it in . I know you were joking , but let's talk about it .
So someone who invests in a balanced fund in South Africa the average balanced unit trust , just for simple language the likelihood is that the fund manager inside there has already allocated maybe already up to maximum , and it's 45% , so they've got the 45% offshore chunk inside the South African shares .
So I mean it's to say your Richmond shares or your AB Invef shares those are not really South African shares anymore . So there is a good chance that an average balanced fund is sitting on 60% 70% offshore explosion .
That's right . So you had the classic argument as to why people didn't put more offshore because you've got Rand hedges in the South African equity market . You still got Rand hedges in the equity market and guys still hold them . But we looked in the high equity space in South Africa . A lot of managers have now moved closer to that 45% offshore exposure .
It makes logical sense to me . You've got way more equities and bonds you can pick offshore . You can reduce the risk of your portfolio . But now you're dealing with currency risk .
So if you look back over the past couple of months at multi-asset funds , the biggest mover of their returns has been currency , because almost half the fund is exposed to the rollercoaster that is the Rand .
Okay , so now let's down that 1750 to 19 . What you're saying is the Rand comes back from 19 to 1750 . Your balance fund , which might have been holding up when the JSE wasn't performing well and everyone was kind of feeling a little bit heroic , all of a sudden might be feeling actually a bit of a pain .
That's it , and it's not because of the assets that you picked . It's the currency that impacts your portfolio and that's why , a president , we feel that the assets should include the currency themselves , right .
So we take views on the Rand , the euro , the pound , the yen and , implicitly , the dollar , and it's important to take those views , separate them out from your asset classes . You can do that , you can .
What we do generally is we hedge you on half of our offshore exposure , which means we don't participate in the movement on the Rand when it goes from 18 to 1950 . Not great , because we haven't benefited from that shoot up , but we also don't participate when it comes from 1950 back to 18 .
So , if you think about a retirement type product , that's pretty important because you're looking to minimize your volatility , that slow , steady profile in , particularly for a retiree , and that's why we feel it's very important to currency hedge at least a part of your portfolio .
So , really , what that means is you've bought something overseas . Once you've sent the Rand's out inside the fund , though , and you said I'm buying share A , I expect share A to go from a dollar to two dollars . That is what the fund will benefit from , and it's irrelevant what the dollar's done to the rate that's been hedged out .
Yeah , I mean . There's . A good example I often give is say , you're a fundamental equity analyst in a house and you want to buy Amazon . Right , you buy dollars , you buy Amazon , you make 10% on Amazon .
Amazing , you've made an awesome pick , but you could have lost 20% on the round at the same time and generally most houses don't deal with currency in that context . Hard to overlay them both on top of each other , whereas if you had hedged out the currency risk , you would have made 10% on your Amazon pick plus roughly 4% on the hedged currency .
So I think we're running to the end of our time and I want to kind of put myself on the on the psychologist couch and I'm sitting with this kind of violent swings in the Rand and kind of getting depressed because everyone I talk to is just freaking out . How do we manage ourselves in this kind of an environment ?
What do we do to kind of just take out the noise and make a sensible decision ?
Yeah , I think , as always , you've got to focus on the longer term . You know , news looks to sell itself , so when you read newspapers , it's always about some sort of scandal which the likelihood of materializing is far lower than you might . It might imply by the headline . So you're going to have things like .
You know , south Africa is switching to a brick's currency , right , and now everyone thinks oh gee , that means we're going to have the bricks that we're going to go to the shops and buy things with now . And it's not like that at all . In fact , there's no real concrete suggestion of a physical currency .
It's more a trade union or a trade agreement amongst the bricks countries .
Okay , so stay focused on the long term . Keep your eye on what you're doing with your money and maybe don't focus on the news so much , because it's noise .
And don't try and time the market if you can help it .
Rupert , thank you so much . Pressient Investment Management , as always . It's a real pleasure to have you on the show . I think it's kind of straightforward . I was going to say nice and simple , but that's a compliment , because fund managers love to make it complicated and you're good at making it simple . I appreciate your talk . Thanks very much for having me .