Given these factors, it makes sense many South African are looking to diversify their investments and protect their capital. The obvious path to safety is to diversify offshore.
Looking at local JSE volumes and geographic product splits across boutique asset managers (usually considered the smart money as they can be more flexible and tactical product choices for clients) it seems quite clear, a large number of South African investors have already built offshore reserves. They’ve protected their nest eggs and are now safely invested.
However, many clients that are invested with the more traditional fund houses are languishing with local exposure, as these lumbering juggernauts have failed to pivot as the situation on the ground has deteriorated. Regulation 28, the pension fund rule forcing you to stay locally-invested, is also skewing many South African portfolios away from optimal geographic asset allocation.
On top of the regulatory issues around pension funds, many people see themselves as limited by the South African Reserve Bank exchange controls. You can only take a finite amount of money overseas each year.
And yet, if you are one of these unfortunate souls, trapped in the quickly deteriorating local investment environment I have some good news.
We are rapidly approaching the end of the year. This may mean you’ve already used up your offshore allowances for 2020.
This would appear to leave you with two choices:
1. Wait until the allowances are reset in January, or
2. Try to get SARB approval which could be both time consuming and costly.
Given the volatility of the rand is looking relatively strong at around 16.60 today, taking option 1 and waiting for January when the gates once again open, could result in significant losses as the currency weakens.
Today I’m going to tell you about a third option not many people know about.
You can lock in the FX current rate and use next year’s allowance, today.
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How is this possible?
In this situation you would use either a forward or future combined with a fixed deposit to create a synthetic structure with a bank. The way I’ve done it for clients in the past, the entire cost will amount to less than 1% of the amount you wish to move.
And, looking at the volatility of the currency currently, 1% is often less than one day’s movement!
So how is it done?
We can use a forward which is quite clean but will be more expensive than a linear currency derivative.
Either way, your first step is to hedge the currency.
If you want to move money out of South African rand and into a US dollar account, you will go long US dollar and short the rand. This means if the rand weakens against the dollar you would make a profit. At the same time, you would place the amount you wish to transfer into a fixed deposit account.
The interest you earn on the fixed deposit offsets some of the cost of the hedging. As I said, the total cost all added together makes up about 1%.
The result, however, is that you have safely locked in your currency rate today and will effectively be able to transfer your cash overseas without any worry of a rapid depreciation over the next three months.
This may sound overly complicated, but it’s actually a very simple structure to create. You could even do this with your local bank. But if you need some help getting it right, I’m happy to assist you with all three components: The hedge, the fixed deposit and the currency transfer.
If you’re not keen on waiting until January to diversify your investments, you can contact me on firstname.lastname@example.org.
Extricating your investments from Regulation 28 products is more complex and, while possible, requires a better knowledge of your personal situation. You’re also welcome to contact me if you’d like to explore the best way of structuring your local retirement money to maximise international diversification.
Private Client Trader