Retirement is one of the most significant once-in-a-lifetime experiences anyone will ever have. As a result, a significant portion of a person’s working life is dedicated to planning for retirement because there is no second chance. The slow economic growth and potential weakening of the rand have South Africans considering diversifying their investments and increasing their offshore exposure.
We have seen that investors in South Africa are criticising retirement funds such as retirement annuities and preservation funds due to offshore limitations. Some are no longer contributing to retirement funds and are instead choosing to move funds offshore as there are many benefits. One of the benefits is that even in these market conditions, maximising your offshore exposure will allow you to benefit from a broader global universe. This means that you are not only limited to what the South African market offers but have more opportunities to invest in long-term growth sectors. Another benefit is diversification, which not only reduces risk but also increases your exposure to fast-growing companies and industries that are not available within the South African borders. Among the benefits is that the investment will benefit from exchange rate movements over and above the invested underlying performance.
Despite the exchange rate offering potential portfolio gains through exchange rate fluctuations, on the contrary, offshore assets introduce more volatility to a portfolio because of sharp fluctuations in the dollar-rand exchange rate. This is where a currency hedging strategy becomes crucial and why we believe offshore exposure is best to manage this volatility. There are better growth prospects outside of South Africa. While our economy recovered strongly from the depths of the Covid crisis, the overall growth picture remains dull (less than 1% in real terms). The skew towards international equities has been due to the higher quality and increased cash flow certainty of growth assets outside of South Africa.
Regulation 28 of the Pension Fund Act limits the extent to which retirement funds may invest in particular assets or in particular asset classes. The purpose is to protect the members’ retirement provisions from the effects of poorly diversified investment portfolios. In April 2022, the Association for Savings and Investments South Africa (Asisa) reviewed its fund classification standards and announced that investors will now be allowed to invest 45% of their retirement funds offshore. This has given some easiness to many investors and fund managers as they are able to increase flexibility and construct portfolios more effectively.
So, the question remains…. Does one maximise the offshore exposure to 45% in retirement funds? The answer is dependent on how much risk are you willing to take, your target relative to inflation and most importantly your investment goals. Asset managers have been researching different risk levels which gives an indication that long-term target allocations to offshore markets are advised, however, short-term opportunities may lead them to increase or decrease these risk levels.
Based on the belief that the grass isn’t always greener on the other side, some investors seek investment opportunities in the local equity and bond markets rather than in the global equity markets. Asisa claims that in 2021, local equity funds outperformed global equity funds by an average of 28%, beating them by 6%. Over the past decade, the average returns of global equity funds were 15% per annum while local funds performed an average of 8% per annum. However, looking back over 20 years, local equity funds performed an average of 13% per annum and global equity funds performed an average of 8% per annum which is 5% less each year. A longer-term perspective demonstrates why it may be generally a good idea to have exposure to offshore and local asset classes, considering that a decade is a long time to experience much lower returns.
It is crucial for investors to make sure they save more and include as much equity as possible in their long-term portfolios in line with their risk profiles and savings terms, even though equities will provide the best returns for you over the medium to long term. It would be wise to sit down with your financial advisor now and determine whether the underlying investments in your portfolio are in line with the current growth outlook and risk tolerance.