Lessons from Enron (and the strong rand)

Lessons from Enron (and the strong rand)

One of the really difficult parts of dealing with people and their money is having to give them bad news about the performance of the funds in which they are invested. They usually react badly and look for all sorts of people to blame (most often this the advisor). Behavioral Finance psychologists tell us that this has something to do with the fact that the pain of loss is about twice as great as the joy experienced from a gain.

The nature of financial advice is such that there will be times when we have to “break the bad news”. Currently this is the case for just about anyone who invested money offshore in the past 10 years…the World Index (in Rand terms) is flat or negative over almost all periods in the last 10 years. And right now, finding anyone who was desperate to get funds out of SA in 2000/2001 is almost like trying to find someone who voted for the National Party during apartheid. What short memories we have and how fickle we are as people. So what lessons could/shoud we learn from this?

Perhaps a good analogy would be to look at the fate of the employees of Enron. It was (and possibly still is) fairly common practise for Americans to invest their pension fund money into the shares of the company for which they work. i.e. Enron employees invested their pension in Enron shares. This makes some sense as there certainly is a vested interest on the part of staff to ensure the success of the company. But there are certain things over which ordinary staff have no control and while things are going fine there is no need for concern. The problem arises when things go wrong…and when they do, ordinary investors are faced with a fundamental “error” when it comes to investing: they failed to diversify!

And so it is with SA – the market has done really well over the past 10 or so years (the ALSI is up around 15% per annum compared to the Global Market index which is marginally negative over the same time). Right now it appears that we should all be investing all of our money into the “company” share in much the same way as Enron employees did. What we fail to remember is that as an investment option, SA represents less than 1% of the total global investment universe. So why would you put 100% of your assets into 1% of the market? The point about diversification is to spread your investment risk and by definition this means that they dont all go up or down at the same time. This has certainly been the case for SA investors who have sent money offshore.

Right now the rand is strong (and getting stronger each day). There are many reasons for this as well as much speculation but one of the most obvious has to do with our interest rates. You can borrow money elsewhere (at almost 0%) and then “invest” it in SA at 6% or more…it is a “no-brainer” as they say. So right now, the rand is strong because people are making money with it. When that no longer applies, we could see ourselves lose favour very quickly and as a result, see the currency weaken very quickly too.

At the same time our share market seems to be fairly resiliant…and the money continues to flow in…fundamentals and politics dont matter… until they matter.

If there is a lesson to be learnt from all of this it is this: right now is an excellent time to be investing outside of SA. Dont wait until it is “too late” and you wished you had done it.

For those wanting to invest offshore (via unit trusts) there are essentially 2 ways:

  1. Asset swap funds – where the money does not physically leave SA and is always paid out in SA but is effectively exposed to offshore markets. You can do this via a debit order for a few hundred rand each month, or
  2. Tax clearance and exchange control. The process is a bit tedious and SARS seems to move the goal posts from time to time. But once you have your tax clearance you are free to invest anywhere in the world and this money can even be paid out offshore as well.