With all the uncertainty in the South African market and concerns about future investment returns, many investors are looking offshore for investment opportunities.
A diversified investment portfolio is always a good strategy when saving for retirement, but before you set off looking for greener pastures in offshore markets, take note of regulation 28 and its integration in retirement annuity (RA) funds, says Jaco Prinsloo, a Certified Financial Planner at Alexander Forbes.
RA funds are governed by regulation 28 of the Pension Funds Act and prescribe limits on the various asset classes in which you can invest.
Regulation 28 is enforced to protect investors against capital loss and smooth investment returns by diversifying their investments between different asset classes such as cash, bonds, property and shares, both local and offshore.
Most RA funds will have to be invested in South Africa, but you can invest up to 30 percent in offshore assets and an additional 10 percent in African assets, excluding South Africa.
However, with most South African listed companies integrated into the global economy, it is estimated that 70 percent of their earnings are generated offshore. This feature increases investors’ offshore exposure from 30 percent to potentially closer to 60 percent, depending on the mandate of the fund. With the added offshore exposure comes risk in the form of currency fluctuations that have to be taken into account when making investment decisions.
The common belief is that the limits of regulation 28 reduce investment returns, which can be true when specific asset classes outperform, but there is no way to know which asset classes those will be. Having a well-diversified portfolio is one solution to this dilemma.
Having exposure to multiple asset classes, both locally and offshore, gives you the best chance of generating the returns required to meet retirement goals without taking unnecessary risk.