The third and final in our series of your burning questions is “How much should I have offshore?” This is a particularly pertinent given the current state of South Africa and the exchange rate.
Investment managers calculate an “efficient frontier” which is the optimum split of assets to earn the best return at the lowest risk. The offshore percentage has typically worked out at ⅓ of assets offshore to produce the best results. This value will fluctuate, and currently suggests a larger offshore percentage, given the relative growth prospects in the developed world compared with an emerging market such as ours.
The other consideration is the proportion of imported goods in our cost of living. This again has been around ⅓ imported, influenced of course by items such as oil (which has halved in price over the past 18 months) and the individual’s lifestyle. Imported luxury cars are an example, or the current requirement to import maize.
You can have offshore exposure in a number of ways:
- Money directly invested offshore, either in offshore currency or via Rand swop funds
- The offshore component of local unit trust funds. Many funds have 25% offshore
- The offshore earnings of SA listed shares, such Richemont, Naspers. MTN or BAT.
Prudential Fund Managers recently published an article in which they suggested that the average balanced fund, which is constrained to 25% offshore, effectively has an offshore exposure of closer to 50% if one considers the underlying offshore exposure of many shares or property stocks in a portfolio.
In considering the offshore exposure it is important to remember that you need to match assets (or income) with liabilities (or expenses) with the same currency exposure. To illustrate the point, there were investors who took a major part of their investment assets offshore in 2002 when the Rand collapsed to R12 to the US$, so as to “protect the value of their assets”. They were seriously hurt when the Rand strengthened to below R6 to the US$ only 3 years later and their income and asset values dropped 50% in Rands.
Those with excess assets above what is required to fund a retirement income, namely assets which they will probably not require in their lifetimes, can afford to put those assets offshore. Those who need all their assets to work for them in providing an income, will need to consider matching assets and liabilities in the same currency.
There are ways of arriving at an optimum percentage, but at the end of the day, the investor’s views of the future will probably outweigh those calculations. So, as a generalisation we would say an offshore exposure of ⅓ of investment assets, adjusted for individual circumstances.