There are many ideas in I-Maps that become much clearer once they can be seen on a map. Currency is one of them.
An offshore holding is not a single source of return for a South African investor: it combines the asset’s return in its home currency with the movement of that currency against the rand.
Two return drivers
One offshore holding, two exposures
When we talk about offshore assets, we often describe the exposure as if it is a single thing. For example, we might say that a South African portfolio holds offshore equities, or that it has a 40% allocation to US assets.
That is true from a holdings point of view. But from a South African investor’s perspective, the return is not just the return of the US equities. It is made up of two parts:
- The return of the US holdings in dollars
- The movement of the dollar against the rand
For example, if a US asset returns 2% in dollars and the dollar strengthens by 3% against the rand, then a South African investor’s rand return is approximately 5%.
Sometimes the currency effect pulls in a similar direction to the asset effect. In those periods, rand weakness may amplify the return of the offshore asset.
At other times, the currency effect pulls in a different direction. A US asset may perform well in dollars, but if the rand strengthens at the same time, the South African investor may experience a much smaller return. Equally, a weak dollar asset return may be softened by rand weakness.
The geometry
Asset and currency effects
The longer-term combined effects of asset return and currency can be seen together on a map.
Starting from Cash, the rand return of a US asset can be thought of as two steps:
- The asset effect: Move in the direction of the US asset in USD, shown as Sp500 on the map.
- The currency effect: Then add the USD/ZAR movement, shown as C-USDZAR on the map.
The combined point sits close to the S&P 500 in ZAR, shown as Sp500_R on the map.
This gives us a visual way to understand what a South African investor is really holding when they hold an offshore asset. They are not only holding the offshore asset. They are also holding the currency movement.
A worked example
A simple portfolio example
Consider the offshore part of a South African portfolio. There are two ways to represent a 40% exposure to the S&P 500.
Direct representation
The offshore asset has already been converted into rand.
Decomposed representation
The asset and currency components are shown separately.
Both descriptions represent the same exposure. One uses the combined rand return, while the other separates the asset and currency components.
On the map, these two portfolio points sit very close together. As we would expect, separating the offshore exposure into its asset and currency components produces almost the same result as using the combined rand return directly.
Managing the currency component
A note on currency hedging
This is also the geometry behind currency hedging.
A hedged position aims to keep the US asset exposure while offsetting the USD/ZAR movement.
For example, a portfolio holding the S&P 500 in ZAR could reduce its currency exposure by taking a short position against USD/ZAR, which offsets much of the currency movement embedded in the S&P 500 in ZAR.
The result is that the investor is largely exposed to the asset return in dollars, without the additional impact of currency fluctuations. On the map, a hedged position would sit closer to the US asset in USD, rather than the combined rand version.
Conclusion
Why this matters for fund managers
Currency can materially change the way offshore exposure behaves.
A US holding in rand is not only a US equity position. It also includes USD/ZAR. The map helps separate these two effects, showing how much of the offshore position comes from the asset itself and how much comes from the currency.
This matters when interpreting portfolio risk, explaining performance and making hedging decisions. It gives fund managers a clearer view of what they are really holding — and what is really driving the position on the map.