GLOBAL - South Africa's surging currency is creating all sorts of problems for fund managers, particularly those wedded to the holy writ of benchmark investing.
The rand’s 26% gain against the US dollar in 2003 took the sizzle out of the commodity boom which saw South Africa’s two major export commodities, gold and platinum, rise 21% and 32% in dollar terms.
In rand terms, platinum ended the year just 4% up, and gold declined 6%.Currency strength also hit the JSE Securities Exchange Top 40 index, which is heavily weighted in favour of dollar-earning resources stocks.
This index, a popular benchmark among retirement fund managers, ended the year up 13%, on a par with the FTSE 100 and the S&P 500. Though the JSE Top 40 index ended the year in positive territory, it is still well shy of the giddy heights reached in 2002.
Those funds that steered clear of the currency issue by buying rand-earning stocks beat the Top 40 index by a handsome margin. The JSE’s Mid Cap index, comprising rand-earning companies for the most part, shot up 29%, while the industrial index gained 19%.
Louis Stassen, head of alternative investments at Coronation Fund Managers, said trustees and fund managers are questioning the wisdom of trying to beat the market, particularly after a protracted bear market. In years past, it was simple to call the direction of the rand.
It declined against the dollar in eight out of the last 10 years, providing a welcome lift to exporters. But that is no longer the case, and fund managers who stick to resources-heavy benchmarks have had a roller-coaster ride over the last two years. This accounts for the swing towards absolute return funds.
South African pension funds are less than 30% weighted in bonds – well below international norms – which creates further drag on performance. Bonds returned a compound 20.9% over the last five years, versus 16.9% for equities and 12.9% for cash.
The progress of the rand over the last two years has changed the nature of the investment game. Peter Urbani, head of research at Fairheads Asset Management, sees the rand strengthening to at least R5.80 to the US dollar (currently R6.30), which is not the kind of news likely to bring cheer to fund managers.
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