Considering 100% Allocation To Offshore Funds In Living Annuities – Is It Sensible?

October 1, 2020
Kim Zietsman, Head: Business Development and Marketing, Laurium Capital

Offshore allocation limits for institutional investors are 30% for international, and one may make an additional allocation to African investments (outside South Africa) of 10%. This said, living annuities do not need to comply with Regulation 28, so in theory, retirees could invest 100% of their living annuity offshore in any asset class. However, if your retirement liability is in rand, it is not very prudent to denominate your entire retirement assets in offshore currency, even if it seems tempting right now.

Furthermore, many South Africans are not aware of the exposure they have to global markets, merely by being invested in our own South African equity market. Investing offshore provides investors with access to companies and opportunities that may not be available in South Africa, so it makes sense to have some exposure to offshore investments in how much to invest offshore and where to invest offshore are questions that advisers grapple with order to diversify your portfolio. How much to invest offshore and where to invest offshore are questions that advisers grapple with and will be very dependent on the client’s risk profile and investment goals. An important starting point is to understand how much exposure you already have offshore simply by being invested in the South African equity market.

The South African equity market, through firms listed on the JSE, has many companies that derive a significant portion of their income from outside South Africa, such as Naspers, Anheuser Busch InBev, Richemont, British American Tobacco, BHP, Anglo American, to name but a few. Because only a small portion of their earnings comes from South Africa, they are not impacted in any meaningful way by the success or failure of the South African economy.

At Laurium Capital we analyse each company for the proportion of earnings derived from both inside and outside South Africa. On this basis, currently the FTSE/JSE All Share Index only has 21% exposed to South Africa, 26% to other emerging markets, 3% to Africa and 50% to developed markets – hence, by investing in the South African equity market, investors are effectively fairly well diversified offshore already. In the Amplify SCI Balanced Fund that we manage for Amplify, we also include additional offshore exposure through exchange traded funds that passively track international indices such as the S&P 500, the Euro Stox and the Russell Value 1000 Index.

Living annuities are an excellent way to reinvest your retirement savings and to draw an income of between 2.5% and 17.5% per annum.

You may also make switches within your living annuity without tax implications. Decisions around asset allocation are an important consideration and the rate at which you draw income from your living annuity is a critical determinant of whether you will be able to sustain your income for the duration of your life. Ensure that your investment portfolio has a well-balanced exposure to growth assets, bonds and cash, locally and offshore, to maximise long-term real returns.

Head: Business Development and Marketing, Laurium Capital

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