The past month has been interesting, and not necessarily in a positive way.
A topic that has dominated discussions professionally and socially, for me at least, has been the increased desire of investors to invest a meaningful portion of their assets offshore. This follows a growing trend where assets under our care are steadily tilting towards hard currency global solutions as time wears on.
The reasons for this vary. The main theme recently has been a desire to hedge oneself from SA political & systematic risk.
When you look back to even a month ago, the risk of a political fallout has increased. Although we don’t think it is highly likely that we will see the country imploding in the next couple of weeks, the risk, in fact, is non-zero and thus does requires our dedicated attention.
In spite of this, we still believe that the most important reason to invest overseas should not be because of a state of nervousness, but rather due to portfolio diversification strategy. It is something we tout quite often as being fundamental to a successful investment strategy.
You may now ask if doing the right thing for the wrong reasons remains the right thing. I would say, ‘In a way, yes’.
The political risk that South Africans believe they face, correctly or otherwise, is that we are at a crossroad where either it all breaks down, or not. The stakes are high. The higher the stakes, the more harrowing the experience of having to live through the events as and when they occur. This is compounded by the fact that what a person stands to lose is the ability to call South Africa home, which is indeed a very emotional consideration. It is therefore very difficult to completely disregard these emotions when making investment decisions.
The problem with making decisions emotionally, is that it is always reactive. In order for your investment strategy to be successful, it is of utmost importance to remain proactive. Not in the sense of trying to predict the future at all, but rather ensuring that your asset & liability profile, remain aligned with a suitable strategy after considering the risks involved in the various options available.
We support the idea of having a healthy portion of your assets invested outside of the country, even if your liabilities are in Rand. By comparison, SA is a small country, and although there are a few very good companies with which one can invest, the universe remains small. There are many sectors that remain underrepresented on the JSE that can only be accessed in a global portfolio. That doesn’t even touch on the multitude of excellent investment companies and opportunities available beyond our borders.
We strongly believe that increasing the geographic breadth of your asset risk exposure is a wise move, all things considered. Doing so enables you to remove your exposure to SA systematic risk, though a few additional issues still need to be considered. While matching your assets and liabilities across different currencies are among the important considerations, ensuring that you have adequate diversification across asset classes should remain your primary consideration. Investing across multiple jurisdictions can also create additional considerations in the event of your death. However, with proper consultation and planning, these issues can be navigated.
The situation we find ourselves in at the moment is rather unique, and requires level headed thinking. Disentangling yourself from SA can be an expensive exercise, and needs to be considered in broader context – SA is not the only country that has risks and challenges, political or otherwise.
Looking at the big picture we recognize the influence of political risk. By its very nature, political risk is almost entirely unpredictable, and difficult to factor into our process. What we can say again, is that diversifying your assets is a good idea, as long as you have a proper plan in place and have considered the implications of selling SA assets and investing offshore.
As we bear witness to a great exodus of cash, I think we all hope that things work out for us; the question we should ask ourselves is not “Am I hedged against the apocalypse?” but rather to look at your balance sheet and ask, “Can this be improved?”.