For many trustees of retirement funds, offshore investing is becoming an integral component of their investment strategies. This trend is increasing following the announcement that National Treasury has increased funds’ foreign assets limit from 20% to 25%, with a further 5% being available for investment in Africa.

The amendments to Regulation 28 of the Pension Funds Act now allows for collective investment schemes asset managers and life companies to invest up to 35% of their total assets offshore.

These developments have made it even more critical for consultants and trustees to consider the fundamental motives for members’ increasing offshore investment exposures. Furthermore, it is crucial that they enable themselves to make informed international investment decisions on behalf of their members.

Choosing a strategy for offshore investing is one of the most important decisions that trustees of retirement funds and members will face.

There are many things that both trustees and their consultants should consider – apart from diversification and risk reduction. These include how much to invest offshore, asset allocations, strategy relating to how each asset class in the portfolio is to be managed and finally, manager selection.

Selecting a manager to manage an offshore portfolio presents a few more challenges than manager selection for local portfolios. There are essentially two avenues through which foreign exposure can be gained.

1. via local managers with global capabilities, or
2. via offshore managers who manage global mandates from their foreign offices.

In the current South African market, simply having access to a universe of global managers and their asset capabilities is no longer sufficient for informed decision-making.  Trustees and consultants need access to in-depth information about individual managers in order to select a manager who can meet members’ offshore investment objectives.

Offshore exposure within an investment strategy serves to offer diversification benefits over the long term. By spreading investments across different geographic regions and currencies, offshore asset classes effectively give local investors the opportunity to diversify investment portfolios and reduce investment risk.

On a strategic long-term basis,  my view is that bonds are the most effective assets for diversification among offshore assets, followed by cash. This is because these asset classes move together with foreign currency to the extent that when local markets are going down, these assets will move in the opposite direction, thereby cushioning local investors in local currency terms.

by Windall Bekker, Head of Investment Consulting at OMAC Actuaries & Consultants