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How to take advantage of Reg 28’s new offshore limits

… and achieve outperformance using a blend of international capabilities

Executive Summary

Fiduciaries and other allocators of capital have never been under greater pressure to look for alternative sources of alpha to optimise returns. Muted returns, volatile markets and growing complexity mean making smarter asset calls is tougher than ever. It is in this context that we reflect on the key announcement by the Finance Minister in his budget speech earlier this year that the offshore investment allowance for institutional investors would be increased from 25% to 30%. At the same time, the allowance for investments into the rest of Africa would also increase by 5% to 10%.

Effectively this means that retirement funds can now take a greater portion of their asset pool offshore, which is a major step for the retirement industry, and will allow investors the opportunity to further diversify their investment portfolios. Not only does the increased offshore allowance make way for further diversification, but also offers elevated foreign exposure after the Rand has strengthened significantly. Now may be a good time to take a fresh look at your portfolio construction and understand all the levers available to maximise the outcomes, says Guy Fletcher, Head of Client Solutions and Research at Sanlam Investments.

It is in this context that we take stock of the available opportunity set within Sanlam Investments.

Where do the opportunities lie?

Capturing alpha (excess return above the benchmark) is key to delivering industry beating performances. More importantly, however, understanding the interaction between multiple strategies is key to delivering compelling and consistent returns.

In this paper, we explore specific elements within the array of international equity capabilities that constitute Sanlam’s stable, and construct a credible combination; one that stands up to healthy scrutiny.

For this exercise we have profiled eight of Sanlam Investments’ international capabilities that have collectively been shown to deliver a composite return comfortably in excess of the MSCI World Index In our methodology we combine non-directly comparable time series by adjusting the covariance matrix to simulate future risk/return relationships, and re-estimating alphas (excess return) for future periods. We then recommend structures with forward profiles over the next year, rebalanced quarterly. Next, we apply a specific analysis protocol to account for a variety of perspectives, targets and finally, a series of optimisation protocols to deliver a combined weighting scheme that has the highest probability of delivering outperformance, at the lowest possible risk.

What this exercise indicates is that we are able to “enhance” the returns of the MSCI World index, even with a set of very disparate, high tracking error active funds through initially targeting the lowest tracking error composite. Thereafter, we changed the optimisation protocols to target superior risk constrained returns; the preferred (ex-ante) portfolios were able to deliver very compelling returns of between 2% and 3% p.a. above MSCI World Index, with tracking errors of below 5%.

Fletcher talks us through the detail.

Download Guy Fletcher’s full, printable white paper below

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