Best Passive Investments if you’re betting on more Rand weakness

With a falling Rand and the surge in value of the country’s dual listed industrial shares, the best ETF to have been invested in recently was the Satrix INDI – the umbrella fund with weighted investments in the JSE’s 25 leading industrial shares. Satrix’s Candice Paine here why that ETF remains the pick of the bunch for those seeking protection against further Rand weakness, and ranks the other popular Satrix offerings on their exchange rate hedging qualities. She also explains what the best option will be for the contrarians who want to swim against the tide, those who believe the Rand could strengthen. – AH  

ALEC HOGG:  Candice Paine from Satrix is with us in the studio. We’ve been looking at the Rand’s performance, Candice and in March 2012, it was R7.60 against the US Dollar. Today it is R11. That’s down 30 percent in a year and a half. If you look at the suite of ETFs in Satrix, how can you use them to protect yourself?

CANDICE PAINE: Yes, Alec that’s an interesting question because the age-old Rand hedge has always been in the resources space. There you would be looking at the RESI ETF. When commodity prices go up, the Rand generally falls and you’d want to be in those resources stocks. But with political uncertainty and the labour unrest and the way that the mining industry is performing of late that correlation has broken down. So what we are seeing is that there are far more Rand hedges in the INDI space which includes more of the dual-listed stocks – stocks that get the majority of their earnings from offshore. Or those that don’t necessarily have to be dual-listed or have their primary listing offshore, but need to be getting their earnings from an offshore source.

ALEC HOGG: Through my career, I can remember with the gold mines for instance whenever the gold price went down, the Rand immediately weakened. That protected the gold mines. It was almost like it was manipulated that way. It is interesting the point you make about the Satrix RESI, which surely in the past, would have been a fantastic hedge but now there are other factors.

CANDICE PAINE: There are other factors. It is still a Rand hedge, but it is just not the perfect Rand hedge that it used to be.

ALEC HOGG: Do you have any correlations of the way it was and the way it is now?

CANDICE PAINE: I don’t but it the correlation has dropped significantly. One of the discussions we’ve been having back in our offices was around the gold ETF, which is not a Satrix product – New Gold run by Absa. But if you are looking at a disaster scenario where you think the Rand is going to completely fall out of bed, then you would start looking at things like the gold ETF, which is what you mentioned earlier.

ALEC HOGG: Then you’ve got to hope like heck that the gold price doesn’t fall with it.

CANDICE PAINE: Absolutely.

ALEC HOGG: So if the RESI is no longer giving you that perfect correlation with Rand weakness, what is?

CANDICE PAINE: Let’s dig a little bit down into the INDI. It is also the ETF and the Unit Trusts that have performed the best over the last five years. A lot of that is around the dual-listed stocks. The others are around the demand that we’ve seen for those particular shares from offshore portfolio managers. Just looking in there, you’ve got stocks like BAT, which makes up six-percent of that index, Richemont at 14.5%, SAB at 18.5%, Naspers, Steinhoff, MediClinic, to name a few others. So you can really see that those are the ones that straddle outside jurisdictions which are growing a lot faster than the South African economy. They are also not exposed to what is going on in our own particular political spectrum. So you can take that thinking and even translate it to the Alsi ETF. The Alsi is obviously resources heavy and we’ve spoken about the resources not being a perfect Rand hedge but there is Rand hedge characteristics in there. In a lot of these dual-listed, large INDI stocks are sitting in that Top 40 index as well, so those are the ETFs that play a defensive role for you.

ALEC HOGG: Narrowing it down: I would have thought it’s quite simple. You buy the Satrix 40 or the All Share index, and you’re going to have a fairly good ride because so much of the JSE now is actually Rand hedges.

CANDICE PAINE: Yes.

ALEC HOGG: But you can refine that by going into the Satrix INDI. How many stocks are in INDI?

CANDICE PAINE: The one that we track, at the moment, is 25 of the largest industrial stocks, so it really an accurate focus on Rand hedge. It is also tended to exclude – just through the nature of how the index is constructed – are some of our large importers, which are, obviously not Rand hedges. So some of the really large retail stocks and Imperial, Barloworld, Clicks, and Foschini have not been in the index. They would not benefit from a weakening of the Rand.

ALEC HOGG: Why aren’t they in the index?

CANDICE PAINE: Just because of the index construction.

ALEC HOGG: So they’re not big enough to be there.

CANDICE PAINE: They are not big enough to be in there.

ALEC HOGG: Of course, you have an offshore product as well, so that would be an obvious hedge…

CANDICE PAINE: Absolutely. We’ve got the MSCI World Equity Feeder Fund. It tracks the MSCI index. It is defensive because it is completely offshore. But it is also developed markets, and developed market stock prices tend to be a lot less volatile than our own emerging market stock prices. Currently it is very well positioned because it is over 50 percent invested in the US and we are seeing a flight to quality at the moment. That is why everything is about Dollar strength, not necessarily Rand weakness, and we are seeing a lot of portfolio flows going back to the Dollar. That really is the ultimate Rand hedge. But not everybody can hold 100 percent of their portfolio offshore, so they need to be looking at local Rand hedges as well.

ALEC HOGG: Just explain that a little bit more, ‘not everybody can hold 100 percent offshore’.

CANDICE PAINE: A lot of investors are either pension fund investors, where they’re subject to Regulation 28, so they could hold a maximum of 25% in the MSCI. If you are taking your money completely offshore, you are limited to R4m a year. I know that is not a lot of people, but if you have discretionary cash in South Africa that you are wanting to invest that is ‘after tax money’ and it isn’t pension fund money you can put 100 percent of that into a MSCI Feeder Fund. The way that the Feeder Fund works is it is a Rand denominated fund, so your money goes into the Fund in Rand. You get the offshore exposure. You get the Rand hedge, and when you disinvest, your money is paid back out to you in Rand.

ALEC HOGG: That sounds like a nice bet, the Feeder Fund. You don’t have to go through all the hoops that SARS asks you for.

CANDICE PAINE: Yes, absolutely. That really is the best way of getting that offshore exposure and hedging your investment against any further Rand depreciation. As you mentioned earlier, the Rand has come back to 11. It hit R11.40 in the last week-and-a-half, so this may be an opening for people who are wanting to get that offshore exposure, to go in there now, without advocating market timing.

ALEC HOGG: All right, so the best bet, if you just want Rand hedge, if that is number one on your priority list, would be the Feeder Fund.

CANDICE PAINE: Yes.

ALEC HOGG: The second best would be the INDI.

CANDICE PAINE: Absolutely.

ALEC HOGG: And only thereafter, you’d go to the Satrix 40, and only thereafter to the RESI. Is that about the pecking order?

CANDICE PAINE: Absolutely. That’s the way that I would do it, yes.

ALEC HOGG: How are you finding the flows from investors, given that the Rand has depreciated so dramatically in the last 18 months? Is the marketplace reacting?

CANDICE PAINE: No, the marketplace isn’t reacting and what we see with the retail investor is they generally and unfortunately, tend to go offshore only once the Rand has weakened. We have, since the beginning of the year, seeing quite substantial flows into that MSCI Feeder Fund, which is very heartening. It means people are taking the investment seriously. The rest of the Satrix flow generally tends to go into that ALSI top 40. Not necessarily because people are looking for a Rand hedge. It is because it is our flagship product and the one that people understand the best.

ALEC HOGG: And that’s the one that’s been around the longest.

CANDICE PAINE: It is the one that’s been around the longest, yes.

ALEC HOGG: And the INDI? That is the one that we’ve been talking quite a lot about here. Are people starting to understand that that is a good Rand hedge (even a better one), than the Satrix 40?

CANDICE PAINE: I don’t think people are starting to understand the Rand hedge implications of it. We have seen flows into the INDI but that really is on the back of the very, great performance that we’ve seen over the last five years. If anybody ranks Unit Trusts or ETFs that’s the one that comes out tops. So what we see in the South African context, is people tend to chase performance as well.

ALEC HOGG: That’s dangerous.

CANDICE PAINE: It is absolutely dangerous but, in this case, they are going to get the Rand hedge too.

ALEC HOGG: Okay, so if you work on the assumption that yesterday’s hero is not going to be tomorrow’s hero, then you would, be saying, “Maybe Rand hedges are not the place to go right now.” You might be looking at non-Rand hedges. Is there anything in the portfolio that is Rand focused?

CANDICE PAINE: In the INDI portfolio?

ALEC HOGG: Well, i.e. if you take a bet in your portfolio (in Satrix), what ETF would you be investing in – if you are saying, “I’m going against the market. I think that the Rand is actually going to strengthen over the next few years”?

CANDICE PAINE: Okay, it is not an ETF. It’s a Unit Trust. It is also a passive investment and that would be our DIVI Plus Unit Trust. What we’ve seen is that portfolio tends to be particularly defensive. Also, it hasn’t fared that well in the recent past because it hasn’t had these dual-listed or these Rand hedge stocks in it. So if you think the Rand isn’t going to weaken going forward, and you want to position your portfolio defensively against any knocks within the South African economic context, then the DIVI Plus is definitely the place that you’d be wanting to go into. Bearing in mind that a large portion, of the performance that you are going to receive, is in the form of a dividend yield.