“Insanity is doing the same thing over and over and expecting different results.”

These words are often attributed to Albert Eistein, but that is false, there is no record he ever said them.  But it is a wise witticism nonetheless.

In late August 2023 I wrote an article with the title “So what are you waiting for?”[1].  It made the case for Kenyan pension schemes to invest offshore to the maximum extent possible on both return and diversification grounds.  It said: “Year to date in 2023 the Kenyan Shilling has devalued from 123.40 to 144.45 to the US Dollar”.

Now at the beginning of November the Shilling stands at 151.20[2].  This is a 4.7% return over a period a little longer than two months[3].  Or approximately 26% annualised[4].  That is a free return that Kenyan pension scheme trustees have overlooked and left untouched in their investment decision making.  There will of course be costs to access the offshore return but at this quantum of return (and the diversification benefit too!) it is the extent you access offshore that is paramount.  Zero allocation multiplied by any return (net of its fees) is still zero.  15%[5], multiplied by a net return of 30% or more (Dollar asset return plus currency devaluation) is a meaningful contribution to portfolio return and hence a meaningful increase to members’ pensions.

The Shilling devaluation has been slow and steady.  It does not make for good newspaper headlines, but it is a powerful investment indicator.  The Shilling started its depreciation (from its plateau at around 100 Shilling to the Dollar) in the first quarter of 2022.  This was a time when all currencies were weak against the Dollar; the Dollar was strong, seen as the place of safety.  By the third quarter of 2022 the Dollar had weakened and currencies appreciated against the Dollar[6].  But not the Shilling, its depreciation continued unabated.  Over the last two years the rate of Shilling exchange rate has sometimes been faster and sometimes slower but it has always been in the same direction.  It is hard to see this changing.  The long-term history of Shilling depreciation against the Dollar is clear and easily explained by Kenyan-specific factors and the well-tested economic theory of Purchasing Power Parity[7].

There is a large regret cost (the aforementioned annual return of 30% or more) for the inaction of not investing offshore.  But there is a significant direct cost too of this inaction.  Year to date Safaricom, the majority stock on the tiny Nairobi Stock Exchange, has halved in value from over KES 24 to under KES 12 per share[8].  This is a -50% year to date return.

But the majority allocation for Kenyan pension schemes is not local equity but local fixed income, which in turn is dominated by Kenyan Government Securities.  Figures from the latest RBA Industry Brief[9] (June 2023) show that total assets have increased from KES Bn 1,515.16 to KES Bn 1,703.69, a 12.4% increase.  And investment in Government Securities has increased from KES Bn 695.51 to KES Bn 814.26, a much larger 17.1% increase.  Therefore, the allocation to Government Securities is increasing as a proportion of portfolios.  It was already an over concentrated investment by Kenyan pension schemes and it has become even more so.  Its returns last year were negative, why will doubling-down lead to a different answer?

Perhaps investment in Government Securities is perceived as safe, but this is simply not so in a rising interest rate environment.  Yields up means prices down.  And there are good reasons to expect further global interest rate rises to come.  Private sector entities[10] investing so heavily in the public sector is a paradox.  I fear it represents a lack of wherewithal and assertiveness by investment decision makers.  And is compounded by balanced mandates[11] and peer comparison rather than specialised mandates and market benchmark comparison[12].

The June 2023 RBA Industry Brief also shows the offshore allocation remains under 2% of the aggregate portfolio.  However, I bet you cannot find a Kenyan who is unaware the Shilling has depreciated this year and last.  They may not be aware it has been approx. 20% year to date, but they will know what it feels like when they go to the supermarket.  Employees may not be able to get paid in Dollars (though I bet they would dearly like to!) but they will expect their deferred pay – their pension – to be well diversified, and that means diversified by currency as well as diversified by asset class.  After all, a Kenyan employee is already “all in” on the Kenyan economy with their employment and salary, it would be crazy to go “all in” on the Kenyan economy with their deferred salary too.

So what are you still waiting for?  I am willing to bet that is the question pension scheme members will have on the tip of their tongue as they see trustees’ inaction regarding offshore investment erode rather than boost their pensions. That is a question I wouldn’t want to be on the receiving end of at the next pension scheme annual meeting.

Andrew Slater FIA CFA

CIO, Star Capital

6 November 2023

[1] Available at https://starcapmgt.com/so-what-are-you-waiting-for/ and its follow-up https://starcapmgt.com/so-what-are-you-waiting-for-redux/

[2] At 3 November 2023, source: https://uk.investing.com/currencies/usd-kes-historical-data

[3] 72 days

[4] Past performance is not a guide to future performance.

[5] 15% is the RBA offshore limit, but it is arguable that the 10% RBA other limit could be used in conjunction to give a total 25% offshore allocation; the optimal allocation from Star Capital’s modelling (see https://starcapmgt.com/kenyan-pension-schemes-and-offshore-investment-the-status-quo-is-not-an-option/) is 40%-60% offshore.

[6] The Euro, Yan and Sterling appreciated.  Even the Rand appreciated, though the Rand has now given up those gains and reverted to its own long-term path of depreciation.

[7] Kenya has sustained higher inflation than US, so Shilling must depreciate against the Dollar.

[8] Source: https://www.safaricom.co.ke/investor-relations-landing/stocks/shares

[9] Available at https://www.rba.go.ke/download/industry-brief-june-2023/?wpdmdl=5184&refresh=6542312f369741698836783

[10] All pension schemes are private sector regardless of the nature of the sponsor as a pension scheme represents an aggregation of assets of individuals.

[11] Which somewhat ironically is creating unbalanced portfolio allocation at the individual scheme level and unnecessary systematic risk at the aggregate market level.

[12] See article available at https://starcapmgt.com/balanced-but-not-balanced/