Set against a volatile investment backdrop and regulatory changes, including the option to invest more offshore, Tamryn Lamb and Earl Van Zyl highlight some key messages from the recent Business Update and offer insights for you to share with your clients.
Help your clients avoid the behaviour penalty
Risk appetite had materially reduced in the years preceding 2020, with investors choosing low-risk money market, income and fixed interest funds and shunning equity or higher-risk funds, as local market returns disappointed and sentiment about the country’s prospects deteriorated. Unsurprisingly, this trend persisted somewhat into 2020 as markets fell off sharply at the onset of the pandemic.
In 2021, the unit trust industry recovered somewhat, recording growth of 11%. Investor risk appetite returned, with the equity unit trust category growing by 30%. This was supported by a tailwind of recovering equity markets and switching from lower risk to higher equity products.
Unfortunately, much of this switching occurred after equity markets had already experienced a surge, meaning many investors lost out on the initial recovery, illustrating once again that it is far easier to switch out of risk than to time your re-entry. The message to reiterate to your clients: It generally pays off to remain invested through the cycle, as painful as it may feel.
Is it the right time to take advantage of increased offshore allocation?
In the February 2022 Budget Speech, National Treasury increased the offshore allocation for retirement and local unit trust investors to 45% of their portfolios. The previous limits were 30% outside Africa, plus 10% in Africa (excluding South Africa).
A look at the spread of offshore allocations across the unit trust industry indicates that many local investment managers were not taking full advantage of the offshore allowance at the previous limits, and it will likely take a while for the increased allocation to be used. The level of offshore exposure will also differ across asset allocation funds, with funds in higher-risk categories likely to use more of the maximum allocation than those that are mandated to take on less risk. An increased allocation to offshore does not necessarily change the overall risk profile or positioning of a mandate, as it does not change the percentage of the portfolio invested in higher-risk assets, like equities, but it can result in more rand currency volatility. This is a factor to consider, particularly for those investors who use low-equity solutions for income drawdowns.
From an Allan Gray perspective, we are currently finding more investment opportunities locally in the face of expensive offshore markets. Our portfolio managers will take advantage of the increased allocation when valuations are more attractive. Please read the local investment update summary for more detail on this.
Your clients may be asking you what factors they should be incorporating when considering how to take advantage of the additional flexibility to invest offshore. Below are some messages we think might be useful:
- Investing offshore does allow for increased diversification which can improve the overall risk/return profile of the portfolio. However, our research suggests that diversification benefits tend to reduce or become less significant beyond a certain point. Over the very long term, this level has been about 40 to 45%. Earl described this in detail in his latest article in our Quarterly Commentary.
- Of course, much depends on the time period you choose. Offshore assets have outperformed SA assets over the last 10 years, and currently, we think SA assets present a better investment opportunity than offshore assets. It remains important to understand where you are in the cycle and to have the patience for long-term decision-making.
- Investing offshore can introduce more currency volatility and, in theory, should also allow for greater differentiation of returns across managers, as there are more opportunities to be different.
- A wider investment universe does not in itself guarantee better returns. Flexibility is prized but only if used appropriately.
Introducing the Allan Gray Offshore Endowment
While allocations have increased for local funds, we also acknowledge the benefit of a carefully constructed offshore product offering.
To this end, we will be launching an offshore endowment later in the year. Domiciled in Guernsey and denominated in foreign currency, the Allan Gray Offshore Endowment will be beneficial for investors who want a portion of their wealth invested internationally and who want the tax and estate planning benefits of an endowment.