Building investment portfolios is a complex business of portfolio theories and implementation challenges and according to Mike Abbott, Director of Wealth at Sable International the underlying investment can affect the investment’s performance.
“Liability matching is important as it can have a significant impact on long-term investment outcomes, it’s the act of matching the currency of your investment portfolio to the currency of your future expenditure,” he said.
Many South Africans have taken advantage of the offshore investment allowance of R10 million per annum and used the allowance to invest with a foreign investment provider.
Investing offshore in this manner is preferable to any of the usual three options considered by South African residents:
holding South African funds with offshore holdings
investing abroad through asset swaps
buying FSB approved offshore funds
“A sudden tightening of exchange control or fall in the rand, could cause an asset swap investor to be in the position they were hoping to prevent: having to repatriate asset swaps into Rands, only then to be applying to move the funds offshore.”
Asset swaps don’t address the primary investment goal that is the safety of a hard currency investment.
When investing into any offshore investment portfolio, there is initially an asset allocation decision i.e. the split between equities, bonds, property and alternatives. The liability matching principle holds that a UK resident intending to spend GBP in retirement should have the fixed income portion of their investment hedged to GBP. This ensures they will only experience the risk associated with the bond portfolio’s credit risk and duration risk. The currency risk is removed.
Abbott added that most global funds are run in this way to ensure the investor receives the risk / return profile promised. However, a South African resident investor is not going to spend GBP or USD in retirement. They will spend ZAR. If their portfolio is in USD and that falls relative to other hard currencies, then in global terms this investor has experienced a capital loss on the conservative element of the portfolio.
When investing abroad in foreign currency funds, unless you are holding 100% equities, you have implicitly (and perhaps unknowingly) taken a currency bet on the conservative element of the portfolio. This is complex but important.
Another time to consider currency optimization is when Plan B would be to move to a different country or when thinking about multi-generational wealth.
Liability matching is the act of matching the currency of your investment portfolio to the currency of your future expenditure. So if your children have emigrated to the UK, US or Australia, these should be the underlying currencies of your investment.
Where none of these options apply, what you actually need is a non-currency optimized investment portfolio. This type of portfolio is complex to implement for South Africans due to regulatory and institutional constraints, but this is the most appropriate solution where there is no clear hard currency of choice for liability matching.
South African investors do seem restricted by international standards. They face exchange control taking the money out; their local advisers can usually only recommend FSB approved offshore funds which are few in number and expensive; and offshore advisers don’t have the permissions to advise them.
At Sable Wealth we have taken the approach of being double-licensed, having the required licenses for the FCA in the UK and the FSB in South Africa.
This gives us the ability to offer South African investors the widest range of options for their offshore investments and opens up the international fund and investment manager universe on an independent basis to the South African investor.
Issued by Sable International