A Way Off the Rand Treadmill for Local Savers

High minimums, lock-ups and distance have long kept ordinary South Africans out of direct offshore investing. That is starting to change.

For many South Africans, the biggest financial goals, from a child’s overseas studies to retirement abroad, are priced in foreign currency. Yet most still save for them in rands.

Alan Yates, head of Distribution at Peregrine Capital, has seen the problem close to home.

“My sister-in-law has been saving for my nephew’s university since he was small. She did everything the textbooks ask of a parent,” he says.

“The one thing she could not control was where he would want to study, and the answer looks more and more like somewhere overseas. Her savings are in rands. His fees will be in dollars or pounds.”She looked at going directly offshore and found the door largely closed. The minimum investments on the funds worth owning were higher than most South Africans can afford, and at the time exceeded her entire annual allowance. The rand-denominated feeder funds she could access kept her money in rands, the very currency she needed to escape.

Lock-ups and quarterly dealing meant that a fee due in September could not depend on money in a fund that paid out in December.

Then there was the manager. “The manager was a name on a factsheet in another time zone, who knew nothing about South Africa, our exchange controls, our currency concerns or the way we think about investing offshore,” says Yates. So she stayed at home, in rands, carrying a hard-currency liability on a soft-currency savings pot.

That compromise comes at a cost, and it compounds. In 2011 a dollar cost about R7; today it costs more than twice that. Every year the rand weakens, a foreign university fee rises in rand terms before the university has increased it at all.

“Savers like her have been running up a down escalator,” says Yates. “The industry’s answer has mostly been to tell them how much to hold offshore, without making it possible to get there.”

In his view, offshore investing in South Africa was built for people with a large lump sum to move abroad and a lawyer to structure it. Debates about special allowances, asset swaps, situs taxes and offshore trusts are valid, he says, but matter only to those already through the gate. For many ordinary savers, the gate itself has been the problem.

Yates says three things should be true for South African investors. First, the minimum investment should fit comfortably within a year’s allowance, so that savers can phase money offshore over time rather than waiting until they have enough. Phasing also removes the pressure of timing the exchange rate. “That’s the one call none of us gets right twice,” he says.

Second, investors should be able to access their money when they need it. Third, the manager should understand South African investors, rather than seeing them merely as a profitable market segment.

In 2015, South Africa became one of the first countries to regulate hedge funds as collective investment schemes, and local retail hedge funds now offer dealing terms and minimums that would surprise many offshore peers.

“The standard investors enjoy at home should not fall away the moment our money crosses the border,” says Yates. Increasingly, it doesn’t have to. A growing number of experienced South African managers are bringing their strategies into direct, regulated offshore funds with daily dealing. Peregrine Capital recently launched two such funds.

For Yates, the point is not which fund an investor chooses, but that the option now exists.

“The next time a South African saver with a foreign liability asks what his or her offshore options are, the answer should not be ‘come back when you have more money’,” he says. “The allowance has doubled. The products have caught up. My nephew will probably still pick the university furthest from home. At least his mother can now save for it in the currency he will spend.”