The next ratings decision before investing

In this advice column Mikayla Collins from NFB Private Wealth answers a question from a reader who wants to know whether his advisor should have held back on making any investment decisions until the ratings agencies make a decision on South Africa.

Q: I just a made an investment of R400 000 via a financial planner who placed these funds within a unit trust portfolio.

My question is twofold:

Firstly, if we are downgraded to “junk” status, is there any possibility of me losing my investment or the investment not yielding the promised dividends?

And, secondly, should I have waited or should the financial planner have advised me to hold on with the investment, pending the outcome of the ratings decision later this year?

The first likely result of a downgrade would be further depreciation of the rand. This would be brought on by foreign investors selling their local assets and taking their money out of South Africa.

To understand how this would affect your personal portfolio, you need to look at the breakdown of the underlying assets and how the portfolio is split between local and foreign assets. A weaker rand means that the foreign holdings would look better, as they would be worth more in local currency terms. In addition, since many of our locally-listed shares are also rand hedges (around 70% of the market cap of the JSE), it’s likely that a large portion of your local holdings would also be protected.

On the other hand, some local assets would suffer as a result of rand weakness. However, since a downgrade would be a well anticipated event, it is most likely that the fund managers with whom your advisor has placed you have adjusted their portfolios accordingly.

Secondly, it is important is that you understand the difference between the long-term and short-term impacts a downgrade might have. Depending on your particular plans and requirements for this investment, your advisor should have selected funds that suit you for the time period you are looking to invest.