Protecting Your Cash From Volatile Currency Exchange Rates


South Africa’s poor economic fundamentals (namely high inflation, chronic twin deficits and poor economic growth) have been hurting our currency for quite some time now.

To safeguard our purchasing power we need to consider the investment options available to protect our hard-earned rands.

Local rand-hedge shares

Rand-hedge shares are shares that are relatively immune to currency fluctuations due to the global scale of their operations.

By investing in these companies, investors can protect their purchasing power and will also benefit from the weakening of the rand. These shares can be bought and sold directly via the Johannesburg Stock Exchange (JSE).

Local asset allocation funds with offshore exposure

These are unit trusts that hold rand hedge stocks and offshore assets.

These unit trusts are managed by fund managers who base their offshore exposure on the mandate (rules) of their specific fund and adjust these underlying holdings (if need be) based on the research and views of the experts and analysts that work for them.

Local asset allocation funds are, however, only allowed to invest 30% of their portfolios offshore (5% in Africa and 25% in the rest of the world).

Rand denominated global funds

These funds are normally referred to as ‘feeder funds’, as they typically feed into offshore asset allocation funds.

Global asset allocation funds follow a similar investment approach to local asset allocation funds, but generally have a greater universe of potential investment opportunities due to the fact that they are situated offshore.

According to the local Association for Savings and Investment South Africa (ASISA) classifications, global asset allocation funds have more than 80% of their funds’ assets invested offshore.

Rand denominated global funds therefore give investors more exposure to foreign assets than local asset allocation funds.

Direct offshore investments

South Africans have an annual allowance of R5 million per registered taxpayer for direct offshore investments. This money can be converted to foreign currency, taken offshore and invested directly into foreign markets.

Local rand hedges, local asset allocation funds and rand denominated global funds all offer the benefit of not having to use your foreign currency allowance or having to go through the process of acquiring foreign currency, whereas with direct offshore investments this is obviously not the case.

Your exposure to either of these options is entirely dependent on your individual investment needs.

Careful attention should therefore be given to your current asset allocation to determine whether you have the necessary offshore exposure required to meet your investment goals.

The unpredictability of financial markets and currencies makes it impossible to accurately predict their movements over the short term. A long-term view should therefore be taken when making investment decisions.

[tip title=”moneysmart tip”]Irrespective of whether you invest in local or offshore assets, be sure to stick to high quality investments and to adhere to your investment plan. As with all major financial decisions it’s always best to consult with a registered and certified financial advisor.[/tip]

About Author

Raul Jorge is a CFP® professional at PSG. He specialises in estate, investment, retirement and risk planning. Prior to joining PSG, Raul completed his BSc (Honours) in Business Administration through the University of Wales and more recently completed his Postgraduate Diploma in Financial Planning through the University of Stellenbosch.