South African pension funds: A review of construction strategies and empirical evidence

Abstract

In this article we investigate whether it is optimal for South African pension funds to allocate the full twenty-five percent of available assets to offshore asset classes as allowed under the revised Regulation 28. Asset allocation optimisation strategies differ with respect to the optimised objective, and we compare the results of seven commonly used asset allocation optimisation models over a 10-, 20- and 30-year investment period. The majority of optimisation models show that domestic-only funds significantly outperform funds with a foreign allocation component over the 10-year investment horizon. Over a 30-year period only one strategy recommends a domestic-only portfolio, three strategies recommend portfolios with a twenty-five percent foreign exposure that significantly outperform their domestic-only counterparts while the remaining three are indifferent between domestic-only or foreign-allocation portfolios. Applying a bootstrap approach we find that the re-sampled mean-variance optimisation strategy applied using a 20-year historical data period is the superior optimisation strategy when measured against four different benchmarks over the three investment horizons.