Last month I wrote an article “If I could turn back time” available at https://starcapmgt.com/if-i-could-turn-back-time/ in which I presented the benefits of diversifying Kenyan portfolios to the maximum with international assets. The principal justification is diversification, and that is timeless, but additionally we are at time where the international return is compelling. Over 2023 a Kenyan pension scheme would have experienced a 48% return with the Star Capital international fund.
2023 was another year where local assets across all asset classes performed poorly, aided by December’s increase in Kenyan interest rates, the largest for a decade. Kenyan equities were the worst performing globally, even worse than China. The situation was compounded by the unnecessary concentration in the portfolios of Kenyan pension schemes. Even though limited to 15%[i] of the portfolio, creating diversification with international allocation (and the other forthright investment views of Star Capital we were publicly saying all last year) would have had a significant impact on the end of year portfolio return. We estimate pension scheme portfolios at end 2023 would be up to 10% higher if they allocated to Star Capital’s international fund at the start of the year. The difference is night and day, and the cause is too much concentration. The solution – full diversification by international investment[ii] – is easy to implement with Star Capital.
The movement of the shilling over the last two years has been abnormal in the sense that it has been monotonic in the direction of depreciation. That is, with zero volatility. Markets by their nature exhibit volatility – sometimes up, sometimes down – against a trend. And the trend for the shilling, and in fact all African currencies, is clear: long term depreciation. We see that whether we look at the rand, the naira or the shilling.
What is abnormal too is the current recent appreciation of the shilling. It is in our view not market-driven and appears supportive of the Kenya euro-bond that is currently being raised to refinance the upcoming maturity of local government debt. It would be in our view a bold investor that bets on the recent appreciation surviving as the depreciation forces are strong. A double digit dollar yield to attract international investors is not a good indicator of confidence in the local economy. Nigeria’s recent large depreciation was recognition that market forces cannot be fought indefinitely. In South Africa, the rand moves largely with market forces[iii]. It shows high volatility because it is so liquid (relative to other African currencies) but the depreciation trend is clear and irreversible in the long-term.
Pension schemes will be regretting they did not embrace diversification and international investing in 2023. But the current artificial circumstances provide pension schemes a way to turn back time by 5 or 6 months or so[iv]. Right now there is a potentially-short window to allocate to international assets to the maximum allowed, benefiting from proper diversification and gaining some of the returns missed in 2023. Opportunities like this to turn back time do not come along very often.
Andrew Slater FIA CFA
CIO Star Capital, 22 February 2024
For more information on how Star Capital can give multi-asset international exposure, boost return and reduce portfolio risk please contact me at andrew.slater@starcapmgt.com or CEO Darshan Ruparelia at darshan.ruparelia@starcapmgt.com
[i] 15% is restrictive, the South African regulatory limit of 45% is a better reflection of the extent African institutional investors should be investing internationally.
[ii] See Star Capital’s article “Going Offshore? Choose Your Boat Wisely” (forthcoming).
[iii] There is an election in May; some political interference with the rand exchange rate would not be unsurprising.
[iv] The shilling/dollar exchange rate was last at current levels in early September 2023.
