The offshore advantage

At Talking Investments with Coronation 2025, CIO Karl Leinberger and Client Fund Manager Siviwe Mazwana explored the growing significance of asset allocation, particularly in light of the increased offshore allowance. The following is an edited summary of their discussion.

THE POWER OF CHANGING PERSPECTIVES 

Siviwe Mazwana:
There’s a fascinating anecdote about Albert Einstein during his time lecturing at the University of Oxford. His assistant noted that Einstein had given students the exact same exam paper as the previous year. “Dr Einstein,” he asked, “isn’t this the same exam you gave this class last year?”

“Yes, yes, yes, yes. Exactly the same,” Einstein replied. 

Puzzled, his assistant asked, “But shouldn’t the questions be different?”

Einstein smiled and said, “The questions may stay the same, but the answers are different.”

And that’s the key – the questions remain constant, but as the world evolves, the answers shift.

Karl, this brings me to asset allocation – why is it such a crucial factor in a changing world?

ASSET ALLOCATION – THE ULTIMATE GAME-CHANGER

Karl Leinberger:
Asset allocation is a high-impact activity. By a country mile, it’s the most important decision you make in investments. It dwarfs every other decision you make. You could select the best equity and fixed income managers, but asset allocation will make or break your portfolio’s performance. I also often make the point that regardless of whether you’re in an equity fund, a bond fund or anything else, it ultimately forms part of a multi-asset class portfolio. You can’t escape the need to make active asset allocation decisions. I love this quote from Archimedes, which captures how I think about asset allocation. “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”

When you examine the performance of Coronation’s multi-asset portfolios over the past three decades, the outperformance is meaningful – enough to materially improve a person’s retirement outcome. Take the Global Balanced Strategy for example. While security selection in the underlying building blocks has been strong, sound asset allocation over time has played an equally pivotal role (see Figure 1).

Figure 2 illustrates the performance of the Coronation Global Balanced Strategy over the past three decades, comparing it to the performance of its underlying building blocks. Conventional wisdom suggests that multi-asset class funds should underperform equities, given that equities have been the winning asset class while bonds and cash tend to dilute (but stabilise) the overall performance. However, our balanced funds have outperformed all the individual asset classes over the last three decades. This, in our view, underscores the power of asset allocation. It’s not a theoretical concept – but a strategy that has delivered consistent, long-term results through active allocation decisions.

THE CHALLENGE OF GETTING ASSET ALLOCATION RIGHT

Siviwe:
Asset allocation is notoriously challenging to get right. Many of our clients follow a strategic asset allocation approach, carefully structuring their portfolios with pre-defined weightings and a well-documented rebalancing framework. But is this enough?

Karl:
A strategic asset allocation strategy will certainly outperform a poorly executed active approach. What does strategic asset allocation have in its favour? It’s consistent and disciplined. On days when markets are falling, you’re buying; when markets go up, you sell. That discipline has value. But in my view, relying solely on strategic asset allocation means you’re leaving money on the table.

If you consider the returns from the major asset classes over the past decade, it is clear that there have been profound opportunities for investors who were prepared to own winning asset classes and avoid losing asset classes. US equities, for example, returned 3.4x over the last decade. European markets, by contrast, have given you a very underwhelming return. Global bonds have returned zero over an entire decade. As good as US equities have been over the last decade, it’s important to remember that they actually declined by  5% during the 2000s. These shifts represent remarkable opportunities that skilled asset allocators could have capitalised on. And, if you look at the returns of our multi-asset class funds and those of several other very skilled managers in the South African market, there is tangible evidence of value added through active asset allocation.

THE RISK OF FIXED ASSET ALLOCATION IN AN UNPREDICTABLE WORLD

While I recognise the value of strategic asset allocation for many investors, I personally would be very uncomfortable for my retirement capital to be managed in such a rigid and predetermined manner. Why? Because one is committing to a fixed allocation – one that remains unchanged over time, despite evolving market risks, shifting asset valuations and regardless of the unanticipated events that will inevitably arise in the years ahead.

Over the past two and a half decades that I’ve been at Coronation, there were four major global events that would have been unimaginable in the ‘90s. The first was 9/11. Back then, air travel had minimal security measures. The idea of terrorists taking their own lives to crash planes was unthinkable. Today, air travel has fundamentally changed – just getting through any major airport security takes hours.

The Global Financial Crisis (GFC) of 2008, that was akin to a ‘100-year flood’,  was considered unimaginable with modern financial architecture. Many clients challenged us for leaving their money in bank deposits. The argument was that no bank was safe, and that the only safe asset was treasuries.

Negative interest rates were also unimaginable. I still find it mind bending that there was a fairly prolonged period in Europe where banks charged you negative interest rates on a mortgage. They paid you to borrow money and buy a house!

Then, of course, the Covid-19 pandemic where we saw a global shutdown of economies, travel restrictions, and supply chain disruptions that were well beyond imagination. This event reshaped economies, industries, and markets in many material ways, and I think we’ll all be telling our grandchildren about that experience.  

Were the last 25 years a one-off? I don’t think so. In fact, I think that the pace of change is, in fact, accelerating. The next two decades will likely be even more disruptive due to rapid digitalisation, AI advancements, geopolitical shifts, and economic uncertainty.

Let’s consider some of the forces shaping the future, like the growing polarization in societies, the rise of economic populism, and the profound impact this is having on politics and how nations are governed – and all this in a time of economic prosperity. How will the electorate respond should we experience a major recession, and what will that mean for economies and societies?

Next, let’s turn to geopolitics. Can we muddle through the next decade or two? Perhaps. But could things escalate into a situation resembling the Cold War, like the world experienced after World War II? I believe that’s a possibility.

Then there’s the issue of heavily indebted developed market sovereigns. Are we sleep-walking into a slow-burning sovereign debt crisis, which, if left unresolved, could have far-reaching consequences.

And of course, we all know about AI. Its impact is inevitable – it will disrupt not just our lives but also the lives of our children, entire societies, economies, industries, and even countries.

The zeitgeist has shifted on climate change, but the reality that the planet is warming is unequivocal, and we do expect that climate change will manifest in a nonlinear, long-dated manner. We have to ask ourselves what this means.

When it comes to South Africa, I think our future over the next decade could look profoundly different depending on whether we’re governed by the current government as opposed to a coalition that includes the EFF, which remains a possibility.

Our message is that none of us truly knows what the future holds. The idea of an asset allocation strategy that is rigid – one that is committed to in advance without any sense of what’s to come – always leaves me a little uneasy. To prosper in the years ahead, I think it will be key to be invested with people you trust, who manage your money with an open mind and respond to these unanticipated and unexpected events as they play out in a sober and thoughtful manner. We are living in chaotic, uncertain times, and my message is that it isn’t going away.

One final point worth emphasizing: Three years ago, the increase in offshore allowances transformed the investment landscape, broadening opportunities for asset allocators. This has been an enormous benefit to the savings industry, in particular to our client portfolios, further reinforcing the argument for using an active asset allocation approach.

THE CORONATION OFFSHORE ADVANTAGE

Siviwe:
Many South African managers are now beginning to establish and expand their offshore propositions. What sets Coronation’s offshore proposition apart from the rest?

Karl:
Our offshore journey didn’t start recently - it began 25 years ago, with a deliberate and methodical approach to building a comprehensive global fund range behind the scenes. These capabilities have been a significant driver of the performance of our multi-asset class funds in South Africa. Unlike many new entrants, our global offering is deeply established, covering all major asset classes and multi-asset class strategies that clients may require, as well as the underlying building blocks. Many of the funds boast 10, 15, 20 or 25-year track records and more than $12 billion is managed by our global efforts, supported by a team of more than 20 professionals with no South African responsibilities, including 17 experts with more than a decade of investment experience. Ultimately, the results speak for themselves – the performance of our global funds (Figure 3) has already delivered substantial value to our clients.

CAN SOUTH AFRICAN MANAGERS SUCCEED IN MANAGING OFFSHORE FUNDS?

Siviwe:
A key question in the industry currently is whether South African managers can truly compete and deliver results for clients in the offshore space. Why should we believe that Coronation has the ability to succeed in this highly competitive offshore space?

Karl:
Clients are right to ask this question. In my view, most domestic managers will struggle to succeed in the offshore space. The risk lies in spreading resources too thinly and lacking critical mass to build world-class teams in both the domestic and global markets. The difference with Coronation is that we have the scale, resources and the experience to invest significantly in building out a world-class global team. You can see this reflected in the numbers. We’re not just selling a story – we’re delivering results over long periods of time. Figure 3 shows that six of the eight funds have outperformed markets in what has been a brutal decade for stock pickers. As we all know, very, very few stock pickers have beaten markets in the last decade. And yet our global funds have been able to do that across six of the eight funds.

Even in the past two years, which have been particularly challenging for active managers, our portfolios have outperformed—despite having only light exposure to the Magnificent Seven tech stocks, which have driven most of the market’s gains. Looking ahead, we remain highly optimistic about future returns, as we continue to apply our disciplined investment approach in a rapidly evolving global landscape.

Siviwe:
Coronation continues to be overweight global equities, and this has proven successful thus far. But given the strong bull run we’ve experienced, why do we continue to maintain this position?

Karl:
The answer lies in stock picking. I would be hesitant to be invested in the global equity indices as a whole. In South Africa, where the industry is actually healthy and many active managers have delivered alpha for clients, it’s difficult to relate to what’s happened in global markets, where very few managers have outperformed markets. The active management ecosystem globally has been hollowed out and severely damaged over the last decade. Large amounts of money have moved from active to passive investing, and in our view, this has seriously damaged the price discovery mechanism in global markets. This, however, presents an opportunity for disciplined stock pickers to deliver alpha in the coming decade. That’s the main reason for our big overweight in global equities – we’re seeing attractive stock picking opportunities, where high-quality businesses are priced remarkably cheaply because they happen to be out of favour with the market.

A look at the MSCI World index returns over the past 30 years highlights just how narrow markets have been in recent years. A handful of large-cap stocks have driven most of the strong index returns.  It’s left many mediocre companies behind, but also plenty of high-quality companies with strong fundamentals trading at attractive valuations – many of them cheaper than what you’d find in South Africa. These stock picking opportunities are precisely where our funds are invested.

We’re genuinely excited about the potential aggregate returns that a skilled stock picker can generate in global equity markets over the next decade.

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