Investing offshore – What should trustees consider?

A strategy for offshore investing is an important decision that trustees of retirement funds and members will face and there are many things they should consider.

John Anderson, Head of National Consulting Strategy at Alexander Forbes, said: “Current thinking suggests that maintaining an offshore component to an investment portfolio is key to diversification and hence, risk reduction.

“But trustees and individual members, where relevant, have several questions they need to ask before taking that step. The considerations below are not exhaustive, but form some of the more important areas that trustees should weigh.

“Trustees and individual members should not forget the principles underlying the objectives of their retirement fund. The setting of the offshore investment strategy is just as important as any other.”

1.HOW MUCH TO INVEST OFFSHORE?

“Studies suggest that an allocation of more than 20% is optimal for portfolios. Asset Liability Models, which explicitly take into account the general member liabilities, also suggest the same,” Anderson advised.

Retirement funds generally aim to provide long-term returns in excess of inflation. Studies performed by asset managers have shown that as much as 30% of the South African inflation basket is related to imported inflation, which supports having a long-term offshore allocation in excess of 20%.

However, retirement funds are restricted to an offshore allocation of up to 20% of total assets in foreign currency denominated portfolio assets, with a further 5% being allowable in the case of foreign currency denominated portfolio assets in Africa.

Ultimately, portfolios including an offshore allocation should be constructed to be consistent with a fund’s risk appetite and the regulatory environment.

2.ASSET ALLOCATION

Said Anderson: “Having made an offshore investment decision, trustees and individual members also need to ensure that they pay due attention to the asset allocation decision, as the success of an investment strategy in meeting fund objectives is heavily reliant on this.”

Offshore investment requires a consideration of the mix between equities, bonds, cash and alternative investment strategies.

This decision can either be delegated to an asset manager (balanced mandates) or managed by the trustees or individual member (specialist mandates). The asset allocation decision will have an impact on the risk levels of the portfolio and any selection should be chosen to meet with the fund’s objectives and risk appetite.

3.ASSET CLASS STRATEGY

It is equally important for trustees and individual members to consider the more detailed aspects of their offshore investment strategy. These will include the qualitative and subjective issues related to managing the portfolio such as:

• Active vs. passive portfolio management
• Fixed allocations vs. allowing managers to make tactical asset allocations
• Determining suitable benchmarks
• Any style biases
• Rebalancing policy – this will be driven by currency moves in addition to asset class returns

“Each of the topics above do not have a clear-cut answer, but trustees and individual members, where relevant, need to assess each topic while paying due attention to their specific fund’s objectives and risk appetite,” Anderson added.

4.SELECTING A MANAGER

The selection of a manager to manage an offshore portfolio presents a few more challenges when compared with manager selection for local portfolios.

The increased universe of asset classes as well as managers adds to the task, but by examining a few key questions, it is possible to make this task manageable:

• Should the trustees or individual member choose a local or offshore manager?
• Should the trustees or individual member consider the use of a multi-manager?
• What sort of mandate should the trustees or individual member give each chosen manager?
• Should they consider pooled, segregated or managed accounts?

All of the above questions will have a critical impact on the fund’s offshore strategy and should be considered carefully.

“It is important for trustees and individual members, where appropriate, to consider the above as an overlay to their selection criteria for the local portfolio, not a replacement. They need to ensure that they strive to select the manager that is best suited to their investment strategy,” Anderson concluded.