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Pension funds should keep offshore assets
by ED WEST for BUSINESS DAY, June 5
Offshore investing may have a poor reputation after last year’s global financial crisis and the strength of
the rand more recently, but there remain compelling reasons why it should constitute part of a pension
fund’s investment portfolio.
Coronation Fund Managers ’ head of institutional business, Kirshni Totaram, said yesterday there had
been much commentary among pensions funds recently questioning offshore investment, given that
exchange controls had shielded SA from the worst of the global financial crisis, and taking into account the
losses last year in developed markets.
However, the investment value of the average local pension fund was down 11,8% for the year, while the
average global pension fund — taking developed countries with no exchange controls into account — was
down 14,7%.
In the UK pension funds fell 10,4%, while in Japan the decline was as high as 20,4%.
But countries with no exchange controls showed “huge” home bias in the allocation of their assets, with
only 25%-35% of their portfolios invested offshore, so the question was whether exchange controls played
any role at all in the decision to invest offshore, said Totaram.
Much of the evidence, taking relative country performances into account, also shows that local markets
caused a greater part of the pension fund losses last year than their offshore investments.
And while SA outperformed the MSCI in local currency terms over the past 10 years, this may not be the
case for the next 10 because inflation risk is more prevalent, economic growth is not likely to match the
past 17 years of good growth, while the change of government generated policy uncertainties.
Diversification from SA’s commodity-heavy economy would offer inflation protection and enhanced
opportunities.
Such diversification offers access to growth regions that benefit from industrialisation and urbanisation, as
well as opportunities not present in SA such as pharmaceutical research and development and gas and
refinery investment.
Coronation Fund Managers senior portfolio manager Louis Stassen said equity markets had not yet fully
recovered in spite of the recent rally. The JSE’s all share index had gained 74,8% from its trough last year,
the UK’s FTSE 100 had risen 49%, while the US Standard & Poor 500 index had risen 34,8% from its low
point.
However, when one assessed these rebounds over three years, the performance was mediocre at best,
and worse over a longer time span.
Reducing one’s equity exposure at this stage would be akin to “throwing the baby out with the bath water”,
and over the medium to long term, equities should still be considered the preferred asset class in a
balanced portfolio, he said.