Grass is not always greener in offshore market
Mica Townsend
With South Africa’s many economic woes, it is often tempting to avoid the local market with your discretionary savings or living annuity. (You cannot really do it in your retirement fund since Regulation 28 of the Pension Funds Act limits the direct offshore exposure to 30%).
But taking your money offshore is not a free lunch. You are not guaranteed a higher return. If you thought predicting stock market movements was difficult, try forecasting what the future looks like in the currency markets, especially when the exchange rate you are looking at involves the rand.
Depending on the political landscape in South Africa at the time, global commodity prices, international trade wars, and a myriad other unpredictable events, the rand could be anywhere from less than R10 to more than R16 – and that is just looking at the last five years against the US dollar as an example.
Over the last five years (to May 31, 2018), the 10X SA Equity class returned 8.6% per year, considerably less than International Equity (13.3% per year), which was the best-performing asset class over this period. No wonder many prospective living annuity customers now want a high offshore equities allocation.
But would they have wanted it five years ago? Absolutely not.
Back in May 2013, SA Equity had returned 10.7% a year over the previous five years, and International Equity only 6.3% a year, less than any South African asset class over the period.
Just as diversification is important within your portfolio from an asset allocation perspective, diversification across geographies and, indeed, currencies also plays a part.
Most local retirement fund portfolios are well-diversified across asset classes, currencies and geographies.
Retirement fund members will own both growth and defensive, local and offshore assets. Even of the portion allocated to the local stock market, half will give you direct or indirect offshore exposure because a significant portion of their earnings is derived from overseas markets; so you are well hedged against currency weakness and a local recession.
Mica Townsend: business development manager, 10x Investments