JOHANNESBURG - With local news agendas dominated by the rand’s dismal performance, recent gross domestic product woes and an economy slipping into a technical recession, South African investors are increasingly seeking shelter via offshore exposure.
But the options are vast and investors need to seriously consider the implications of counting on locally listed rand-hedged stocks as a substitute for a truly global portfolio.
While a number of local stocks are referred to as “rand hedges” - and are said to benefit from a weaker rand - most of these are not pure rand hedges and, as such, are still largely impacted by rand weakness and local political issues.
All too often, South African investors see “rand hedge” and, because they are overexposed to South Africa and are so desperate to manage the associated risk, they overlook the causal drivers of return for these investments. This can unfortunately result in either the stock quality, the price, the diversification or some combination thereof being overlooked - all-the-while maintaining significant exposure to South Africa, depending on how pure the rand hedge is.
A pure rand-hedge stock is a listed company with very limited exposure to South Africa by revenues or operations.
There aren’t many pure rand hedges listed on the JSE, though there are a number of less pure rand hedges with varying degrees of protection against rand weakness, such as Naspers, BAT, AB InBev, BHP Billiton and Glencore.
With this in mind, investors should only include JSE rand-hedge stocks in their portfolios if they are high-quality businesses trading at attractive prices and will not lead to overexposure to any specific company, industry or country.
However, given the very limited opportunity set for rand-hedge stocks listed on the JSE, putting together a diversified portfolio of high-quality businesses trading at attractive prices is near impossible.
In total, there are about 100 reasonably liquid stocks listed on the JSE, of which perhaps 40 could be considered rand-hedged to some extent.
If we consider that roughly 30% of all companies are high-quality businesses, this leaves more or less 12 high-quality JSE-listed rand hedges - very few of which are likely to be attractively priced. Another significant drawback of these stocks is that investors won’t have direct access to their funds from abroad.
South African investment accounts are not directly accessible from anywhere else in the world because of exchange controls, which is a major risk factor.
All investors should aim to build wealth that would be accessible from any country, including South Africa, and for this you need a truly global portfolio.
Furthermore, the opportunity set is far wider on a global level, with more than 7000 reasonably liquid investments. A good process applied to this opportunity set is likely to be vastly superior in terms of quality, price and diversification when compared to a portfolio selected from a smaller subset, such as JSE-listed rand hedges.
David Nathanson is a global equity specialist at Bellwood Capital.