Investing offshore in retirement

International diversification may be on top of your mind for a multitude of reasons. Perhaps you are tempted to increase your retirement portfolio’s international exposure due to current sentiment towards the country, specific currency expectations, or the recent disappointing returns from most local asset classes.

It is, however, important to remember that having exposure to foreign asset classes is not about timing. Instead, it is an allocation that you should be making with strategic (not temporary) reasons in mind. Moreover, there are specific considerations that are unique to those already in retirement. While it may be best to draw up a comprehensive financial plan with a qualified financial adviser, we can offer the following general guidance to consider as part of your decisionmaking process.

BE MINDFUL OF WHAT’S IN YOUR SHOPPING BASKET

Many items in your shopping basket (from fuel to food to possibly your biggest expense, healthcare)are largely priced in foreign currencies as the inputs are either commodities (with prices struck in global markets), or heavily reliant on imported content. Having adequate international exposure is a hedge against the long-term change in price of this part of your future shopping basket. Episodes of currency weakness will more than likely remain a strong driver of price increases into the future.

The performance of the rand significantly impacts how investors perceive international investments.

The caveat to this argument is that too much offshore exposure can hurt your portfolio due to inflation rates being much lower in international markets. SouthAfrican inflation is much higher than the rest of the developed world, which sets a significant hurdle for investors that want inflation-beating returns. For instance, it is less relevant to get US dollar returns ahead of inflation when you are living inSouth Africa and require returns ahead of SA inflation. This results in the unintended consequence of becoming too dependent on continued rand weakness.

REMEMBER THE CURRENCY IN WHICH YOU NEED TO FUND YOUR RETIREMENT INCOME

You may have decided to spend the rest of your retirement years in South Africa. This means you need to draw a rand-denominated income from your living annuity portfolio over the long term. As the local currency can be volatile, you should guard against having too much international exposure within your living annuity portfolio.

YOU MAY ALREADY HAVE SUFFICIENT OFFSHORE EXPOSURE

As a retired investor, your retirement savings are likely to be invested in a living annuity product of which the underlying investment is a balanced fund where regulatory limits allow up to 30% offshore exposure. In addition, there are a multitude of JSE-listed businesses that would make up part of your South African allocation, but that are in fact truly global businesses, such as Naspers, British American Tobacco and Anheuser Busch Inbev, to name a few. In the case of Coronation’s multi-asset funds aimed at post-retirement investors, you may already have sufficient offshore exposure when you consider the total international exposure. Take the Coronation Capital Plus Fund (our flagship post-retirement fund) as an example. The fund has direct offshore exposure to international assets of 26.5%, however, the total non-SA exposure in the fund is 55.3% 1 once you look through our domestic equity component where a large portion of our holdings’ economic exposure is outside of South Africa.

DISCRETIONARY MONEY (OUTSIDE OF YOUR RETIREMENT FUND) CAN BE INVESTED OFFSHORE

You may have discretionary money outside of your living annuity that you regard as surplus to your own retirement funding requirements and that you want to leave to future generations. Perhaps you want to ensure financial comfort for your children on a different continent or assist with funding of a grandchild’s international education. If this sounds like you, then consider investing in a hard currency-denominated and foreign domiciled international fund.

These funds hold assets selected from all global markets and are managed to serve your needs in foreign currency terms.

They also benefit from the full externalisation of your assets: not only are they benchmarked against global markets, they are also established and regulated outside of South Africa and denominated in hard currencies. This means that when the time comes for the next generation to spend that investment, they'll know exactly what it’s worth – no dependency on rand conversion.

Here, too, a multi-asset class fund may meet the needs of most investors. With single-asset class funds (such as a global equity fund), you take your own asset allocation responsibility. The risk is that you may be tempted to switch into or out of an asset class at the wrong time. In times of increased economic uncertainty, we think that most investors are better served by investing in a multi-asset class fund (such as a balanced fund) where the professional investment managers actively vary the exposure to different assets on your behalf.

Coronation offers two international balanced funds, Coronation Global Managed andCoronation Global Capital Plus, which meet different investor needs. We also offer these funds in rand-denominated versions. •

Figures as at 31 July 2019

To find out more about investing offshore, visit www.coronation.com or speak to your financial adviser. For more information about the funds mentioned, download the comprehensive factsheets from their website.