Star Capital returns 48% in 2023
International markets gave positive return
Kenyan markets gave negative return
The Kenyan Central Bank gave an early xmas present on 5 December 2023 when it raised interest rates by 2%, its largest hike since 2011, more than a decade ago[i].
Source: https://www.worldgovernmentbonds.com/country/kenya/
The bond mathematics textbook says “yields up means prices down”. Therefore Kenyan pension schemes are looking at another poor year in 2023, perhaps even negative returns. This is because their portfolios are unnecessarily concentrated – or equivalently unnecessarily risky – in domestic fixed income.
And the little diversification into local equity was rewarded with negative 32% return[ii]. Last year the Nairobi stock market was the world’s worst performer[iii]. Contrast that with the S&P 500 returning positive 24% return[iv] in 2023, a stark difference.
The inversion of the local yield curve indicates tough times ahead for the Kenyan economy: recession and more inflation beckon. And the message for the shilling exchange rate is also clear: its monotonic depreciation will show no sign of stopping.
The current rate of depreciation in 2024 is a fast as seen at its peak last year, at approx. 3% per month[v]. Without international allocation in their portfolios Kenyan pension schemes will miss out and members will needlessly retire poorer.
The answer is staring Kenyan pension schemes in the face: allocate to international, but allocate correctly without repeating the mistakes of the past. If RBA’s Table G is set aside, we calculate that Kenyan pension schemes should be at a minimum 40% allocated internationally[vi]. This is in line with the South African regulator allowing its pension schemes to allocate 45% internationally[vii].
When the Table G limit of 15% to international[viii] is taken into account, it is a no-brainer to allocate to the maximum allowed and make that allocation now. This is the right thing to do on diversification grounds alone. Diversification is how you reduce investment risk. Considerations of return just further strengthen the case for maximal and immediate allocation to international.
The Star Capital fund is a specialist multi-asset class international fund which has been designed by African pension professionals for African pension schemes. South African pension schemes are already benefiting, and it is now available for Kenyan pension schemes too. It provides the diversification Kenyan pension funds need: diversification from local return sources and diversification amongst the international return sources. And because the world does not stand still, it is active in its investment approach. Since inception the fund has demonstrated 2.7% annualised gross alpha[ix] by way of outperformance of its benchmark.
Source: Star Capital Global Balanced Flexible Fund factsheet December 2023
A Kenyan pension scheme which invested in the Star Capital fund on 1 January 2023 would have a 48.68% return[x] in shilling (versus a benchmark return of 46.48%[xi]) for the year to gift their members as a xmas present.
So what are you waiting for? The best time to invest offshore was a year ago, but those returns will unfortunately have to written off with regret. But the conditions that made international investment a year ago the right decision are just as relevant today. And perhaps even more so given the deterioration of local conditions. Time to get your skates on and get offshore with Star Capital.
Andrew Slater FIA CFA
CIO Star Capital
17 January 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] Source: https://www.businessdailyafrica.com/bd/economy/shilling-depreciates-faster-despite-cbk-interest-rate-hike-4485992
[ii] Source: https://www.bloomberg.com/news/articles/2023-11-09/kenya-stock-bulls-still-rare-as-investors-resist-low-valuations
[iii] https://www.bnnbloomberg.ca/kenya-s-stock-market-becomes-world-s-worst-performer-1.1979077
[iv] Source: https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes/
[v] Source: author’s calculation
[vi] Source: author’s analysis, available on request
[vii] Source: https://www.bloomberg.com/news/articles/2022-03-11/south-african-investors-face-quandary-over-offshore-exposure
[viii] Source: https://www.rba.go.ke/investment-regulations-policies/
[ix] Source: Star Capital Global Balanced Flexible Fund factsheet December 2023
[x] Source: Star Capital Global Balanced Flexible Fund factsheet December 2023
[xi] Source: Star Capital Global Balanced Flexible Fund factsheet December 2023
