Do you need to rush offshore?

NOT NECESSARILY: IT DOESN’T MEAN YOU’LL BE BETTER OFF

Currency, political and liquidity risk should also be considered – Richo Venter.

Offshore allocation limits for institutional investors like pension funds have increased to 30% (from 25%), and the special allocation to African investments (outside SA) to 10% (5%), in terms of the Pension Funds Act’s Regulation 28.

But this doesn’t necessarily mean investors should rush offshore, or that they’ll be better off long term if they did.

Stanlib’s Richo Venter says that in recent years – when offshore exposure was capped at 25% (excluding Africa) – low-equity balanced funds only had an average 15% to 17% offshore exposure, and medium-equity and high-equity balanced funds just above 20%.

He says discussions with fund managers suggest most believe there’s an opportunity to increase global exposure to 30%, but since some expect the rand to remain relatively strong for a while, they don’t think it’s currently a good option.

However, a handful have already moved closer to 30%. Managers like Allan Gray have made small allocations to Africa sometimes, but it doesn’t seem the 10% limit will make much difference at this stage, since most are generally nowhere near 5%.

Venter says African investments are new territory to most local managers. Currency, political and liquidity risk should also be considered and it may be expensive to trade and transact.

Huge opportunity in Africa

He adds that there’s obviously huge opportunity in Africa for investors willing to do the appropriate investment research and take on calculated risks.

Venter estimates at least 50% of locally listed stocks’ earnings are derived abroad. Naspers has the highest weighting in the JSE All Share Index, at about 18%.

Through its Tencent holdings and other offshore businesses, a vast majority of its income is derived abroad. Thus, if investors use a higher offshore allocation, their portfolios will increasingly be exposed to a foreign earnings stream.

It’s then important to consider potential mismatches between assets and liabilities (e.g. the portfolio earns income in foreign currency but pensioners incur costs in rand).

Global exposure offers great diversification options and provides exposure to shares and instruments that can’t be accessed locally. However, Venter expects SA stocks to marginally outperform global equities in the very long run, due to the developing attributes of SA versus the developed markets bias of global equities.

Stanlib Multi-Manager’s optimisation model suggests a 25% global allocation is probably sufficient for investors in a typical high-equity balanced fund with an inflation plus 6% target. Stanlib’s initial analysis shows a highor medium-equity balanced fund doesn’t necessarily need over 25% global exposure long term.

In a low equity portfolio, 20% is probably enough to provide enough diversification and an appropriate return over time.

Stanlib’s modelling suggests in the long run, global exposure should primarily focus on equities, and fixed income assets like cash and bonds should primarily be accessed locally.

However, global bonds can be a great diversifier in a financial crisis.