should-you-be-increasing-your-off-shore-exposure Offshore Exposure in Retirement

Including some offshore assets in your post-retirement portfolio could offer you higher returns and reduce the volatility of your portfolio. The Glacier by Sanlam Research team has put together some thought-starters for you to consider, and discuss with your financial planner.

What are the benefits of increasing your offshore exposure?

You’ve spent an enormous part of your life working towards securing your retirement income. Your transition into retirement was undoubtedly one of the most significant once-off life events you’ve experienced. Moving from actively earning an income to passively generating income as a retiree is a huge shift to make; it’s understandable, then, that the more you can do to ensure your post-retirement portfolio is both offering returns and protected, as much as it can be, from market volatility, the better. One of the ways to achieve these things is to increase the offshore exposure within your portfolio.

In addition to the diversification benefits and the potential for higher returns, studies have shown that the inclusion of offshore assets can also reduce volatility in a portfolio – an important consideration for a retiree drawing an income like yourself, especially considering what recently happened during the COVID-19 global sell-off.

What does the law allow for?

Regulation 28 of the Pension Funds 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.

However, unlike pre-retirement funds (such as RAs), retirement income products such as living annuities are not legally required to adhere to the investment guidelines as detailed in Regulation 28 of the Pension Funds Act. That said, it’s wise to consider similar guidelines, which fundamentally recommend diversification of asset classes in order to reduce your risk exposure. This is something best considered with your financial planner, since the amount of offshore exposure you give to your post-retirement portfolio will depend on a number of variables highly personal to you: for example, the size of your capital, the amount of income you’re drawing each month, how healthy you are and how long you expect to live, and so on.

SA vs foreign equity performance over the last 10 years

A notable observation is that South African retirees, together with their financial planners, are actively increasing their exposure to equities within their retirement portfolios, at the cost of cash holdings, in order to keep up with the growth required to maintain their income.

From a pure return and risk-adjusted return perspective (a measure that considers how much risk is involved in generating the return), figures show that SA investors would have generated greater performance in rand terms from offshore equity than SA equity over the last 10-year period, ending 31 December 2019.

What does this distil down to?

You will likely benefit from including some foreign equity in your post-retirement portfolio – speak to your financial planner about your current offshore exposure, and how much exposure would suit your circumstances.

Please consult with a financial planner before you take any action regarding your savings and investments

Glacier Financial Solutions (Pty) Ltd and Sanlam Life Insurance Ltd are licensed financial services providers