A road trip to financial freedom

Offshore investing 101: dollar vs rand return and why you want the rand to weaken

By Lizelle Steyn

16 October 2021

dollar vs rand is like a fruit market

Photo credit: Erik Scheel


Whether driven by fear or the quest for diversification, South Africans frequently hand over their rands to global managers running portfolios in another currency, typically US dollar. That leads to the headache of trying to figure out the difference between the dollar return vs rand return of your portfolio. How do you calculate your rand return when you’re shown a dollar return? And once you’ve handed over your money, why will you happily see the rand weaken?

Maybe we should start with a ‘currency’ that feels more real, like fruit. Imagine we’re back in the barter system. In your community everyone gets paid in bananas and also pay their bills in bananas. But in the rest of the world most people are trading in figs. You want to diversify your fruit basket a bit. So you hand over some bananas to Mr Green Fingers who tags a fig tree with your name and promises to take good care of it so you can have more figs down the line.

At the start of the year you swap 40 bananas for a tree with Mr Green Fingers that has 20 figs. That’s all you can afford, because the swap rate (currency) at the time is 2 bananas for 1 fig. During the year Mr Green Fingers grows that tree with 20 figs to one with 30 figs for you. That’s 50% growth! Happy days.

Imagine scenario 1 – no change in the value of bananas vs figs

In a scenario where there was no change in the value of bananas vs figs, your tree with 30 figs would be worth 60 bananas at the end of the year, because the swap rate is still 2 bananas for 1 fig. In banana terms you also enjoyed 50% growth. The table below captures this scenario for us.

Table 1: the value of bananas stay the same

1 January 31 December
You swap 40 bananas
Swap value at start 2 bananas = 1 fig
You get a tree with 20 figs
That tree grows to one with 30 figs
Your return in figs (30-20)/20 = 50%
Swap value at end 2 bananas = 1 fig
You get back 60 bananas
Your return in bananas (60-40)/40 = 50%

But things would have been very different if bananas became sought after during the year.

Scenario 2 – bananas become more valuable

Imagine a scenario where for some reason bananas become the next ‘hot thing’. (Like blueberries not so long ago.) It started off calmly with 2 bananas being traded for every fig, but at the end of the year bananas are so valuable you need to exchange only 1 banana for every fig. Your fig tree with its 30 figs is now worth only 30 bananas. The people of your banana community is feeling very chuffed about their valuable bananas, but what a disaster for you who wanted to diversify a year ago. Remember you handed over 40 bananas at the start of the year, and now you’re getting back only 30. While your fig tree has grown by 50%, you’re 25% worse off in bananas than at the start of the year. And you need those bananas because you can only use them to pay your bills in your community. No figs accepted. You have lost in banana terms.

Table 2: bananas become more valuable

1 January 31 December
You swap 40 bananas
Swap value at start 2 bananas = 1 fig
You get a tree with 20 figs
That tree grows to one with 30 figs
Your return in figs (30-20)/20 = 50%
Swap value at end 1 banana = 1 fig
You get back 30 bananas
Your return in bananas (30-40)/40 = -25%

Had the opposite happened, in other words had bananas gone ‘pear-shaped’ during the year, you would have done even better in banana terms than in fig terms. It sounds counterintuitive until we do the maths. Let’s capture this third possibility, a scenario where bananas become less valuable during the year.

Scenario 3 – bananas become less valuable

Imagine a scenario where we again start off with 2 bananas being traded for every fig, but at the end of the year the swap rate is 3 bananas for every fig. Your fig tree with its 30 figs is now worth 90 bananas! In fig terms your assets have grown by a handsome 50%, but in banana terms they’re worth a stupendous 125% more. You’ve enjoyed the result of a good tree grower (portfolio manager or index tracker) plus you’ve enjoyed the tailwind of weakening banana ‘prices’.

Table 3: bananas become less valuable

1 January 31 December
You swap 40 bananas
Swap value at start 2 bananas = 1 fig
You get a tree with 20 figs
That tree grows to one with 30 figs
Your return in figs (30-20)/20 = 50%
Swap value at end 3 bananas = 1 fig
You get back 90 bananas
Your return in bananas (90-40)/40 = 125%

Now replace ‘banana’ with ‘rand’ and ‘fig’ with ‘dollar’ and the three scenarios above capture the 3 directions the exchange rate can go: stay static (stable), strengthen, or weaken. The latter is what you want for your portfolio. As mentioned, it feels counterintuitive, but when you jot it all down, the maths don’t lie. It becomes a little bit more intuitive when you think of your money as an overseas tourist about to visit SA at the end of your investment period. Would you want to visit at a time when the rand is weak or when it’s strong? Weak, of course, so you can buy more with your dollars, euros or yen. It’s the same for your money living offshore when it comes back to pay your bills here. When you go offshore, you want a relatively strong rand, and when you bring the money back into the country, you want a weaker rand.

Some investment platforms like Allan Gray already show you the rand return of your offshore funds when you log into your secure online account. For others, like Easy Equities, you’ll need to draw up a table similar to the one I have above and calculate your rand return yourself, populating it with the exchange rate when you invested and the rate when you disinvested or valued your portfolio. Example below:

Start of investment period End of investment period
Rand amount transferred to $ account R30 000 [check your transaction history]
Rand/$ rate at start R10/$
$ amount invested $3 000
$ amount at end $4 000 [check your account value]
Your $ return (4 000 – 3 000)/3 000 = 33.3%
Rand/$ rate at end R15/$
You get back in rand R60 000
Your rand return (60 000 – 30 000)/30 000 = 100%

The above example assumes you made a once-off lump sum investment and not a whole series of investments (for which it’s more complicated to calculate a rand return.)

What if you’ll use the money from your dollar portfolio overseas?

‘Wait a minute,’ you may say. ‘I’m not going to use my offshore money here in South Africa.’ Maybe you’ll use it for travelling or emigrating or funding your kid’s (or your own) offshore education. Well in that case, you’ll only be concerned with the dollar return (with how much your fig tree has grown.) Fluctuations in the exchange rate no longer matter once your money is offshore and you intend to use it offshore. Once it’s in dollar and destined for dollar payments it becomes what’s called a ‘rand hedge'. Where the rand is heading no longer concerns you. You’re protected against events that may cause the rand to weaken between now and when it’s time to settle your offshore bills.

To summarise, if you're taking money offshore to pay your future offshore bills, it's the dollar return you're interested in; if you're taking money offshore just to diversify your portfolio and you'll likely use it to pay your bills in rands, the rand return is all that matters.