Abstract
Regulation 28 of the Pension Funds Act now permits an increased allocation of 25 per cent to foreign investments. The regulation previously only permitted a 20 per cent allocation. Establishing the optimal foreign allocation for South African portfolio managers given the 25 per cent upper bound is an important consideration for strategic portfolio planning. In this paper we consider two methodological approaches to establish a strategic foreign allocation weight. Our first approach considers the strategic role of foreign investment in South African global balanced portfolios by using a mean-variance efficient frontier framework over a long-term period. We also implement a second assessment methodology that utilises a nonparametric procedure. Both the mean-variance and the non-parametric methodology yield compelling evidence for the foreign allocation to be set at the maximum allowable bound of 25 per cent.
Highlights
Regulation 28 of the Pension Funds Act as of July 2011 permits South Africans to allocate 25 per cent of their pension funds to foreign investments as well as an additional 5 per cent to other African-country asset classes
Our first approach considers the strategic role of foreign investment in South African global balanced portfolios by utilising a mean-variance efficient frontier framework over the relatively long-term dating back to 1971, encapsulating a variety of economic regimes
We provide details of what the foreign allocation weights were across the risk spectrum of efficient portfolios
Summary
Regulation 28 of the Pension Funds Act as of July 2011 permits South Africans to allocate 25 per cent of their pension funds to foreign investments as well as an additional 5 per cent to other African-country asset classes (see the Financial Services Board website: www.fsb.co.za). Previous research in South Africa (prior to July 2011 when the previous regime of Regulation 28 constrained foreign investment to only 20 per cent) shows that it was optimal to have allocated the entire 20 per cent to foreign assets (see Bradfield, Munro, Silberman & Hendricks, 2010). Our first approach considers the strategic role of foreign investment in South African global balanced portfolios by utilising a mean-variance efficient frontier framework over the relatively long-term dating back to 1971, encapsulating a variety of economic regimes. Our approach is to establish the allocation to foreign assets across the entire risk spectrum of the efficient frontier. We provide details of what the foreign allocation weights were across the risk spectrum of efficient portfolios
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