What is the Optimal Offshore Allocation?

At the recent National Budget Speech, it was announced that South African pension funds and Regulation 28 (Reg28) compliant funds are now allowed to allocate up to 45% of their total portfolio to offshore investments. The obvious question is then: What is the optimal offshore allocation for South African investors? In this research, we attempt to answer this question by combining our previous research on the topic with the recent work done by Bradfield and Munro (2015), refining their analysis methods and extending their study to account for additional important factors. In particular, we start by asking how much offshore exposure we already obtain when investing locally. Then we discuss and implement two approaches for determining the optimal allocation. At the risk of spoiling the punchline, this is a complex problem with a lot of moving parts and there is no single universally optimal offshore allocation. Instead, any optimal allocation will always be specific to the situation and investor, and determined principally by five key factors: return and risk objectives, market views, currency management policy, investment horizon, and implementation policy