Love your country from afar
Why successful investing is by textbook not emotion
Over my years advising pension scheme in many countries, one question keeps coming up: am I being unfaithful to my country by investing overseas? The answer is categorically no. Investment decisions must be made by analysis not emotion. This is particularly relevant for money under fiduciary duty such as a pension scheme.
In Kenya it dismays me that trustees allocate so little to international and that the pension regulator is unnecessary restrictive at capping international at 15% of the portfolio. A recent report from Word Bank[1] says Kenyan pensions schemes should be 100% offshore. Star Capital’s own analysis shows the optimum is 40-60% (see Appendix, exhibits 1-3). The textbooks all say that robust portfolio construction comes from diversification, not the concentration exhibited in Kenya with allocation to domestic asset classes (and predominately fixed income) only. Fiduciary duty says trustees must invest like a prudent person, and a prudent person diversifies.
Star has an international fund which gives a turnkey solution to allow trustees to invest offshore with confidence. A pension scheme that invested offshore with Star at the start of 2023 would have a fund capital value which is 10% higher than it is today. Investing offshore not only brings diversification but higher and more stable returns. This ultimately means higher pensions. Don’t forgot pensioners are consumers too! Richer pensioners mean a stronger local economy.
Money invested internationally provides many more opportunities, both for return and diversification than locally in Kenya. The capital may be offshore but coupons and dividends return to Kenya. Indeed the whole capital has to return to Kenya at the trustees’ discretion. This generates currency exchange inflow which moderate the shilling, both its level and volatility.
The South African experience is pertinent. Pension schemes, both with public and private sector sponsors[2], have embraced international investing, and have been rewarded handsomely for doing so. The regulator now allows 45% of the portfolio to be international (see Appendix, exhibit 4). It is a win-win situation for all parties.
The investment case for Kenyan pension schemes investing internationally to the maximum could not be stronger. It is the proverbial “no brainer”, and South African pension schemes have benefited from doing so for decades. However, there is also another consideration; pensions are deferred pay. An employee cannot diversify their employment away from the local economy. But they can diversify their deferred pay, their pension. To not do so unnecessarily creates a double whammy situation. Remember Enron? People lost both their employment and their pension. We do not want a country-wide double whammy from failing to mitigate by diversification a systemic risk.
Andrew Slater FIA CFA,
CIO Star Capital, 8 May 2024
For more information on how Star Capital can give multi-asset international exposure, boost return and reduce portfolio risk please contact me at andrew.slater@starcapmgt.com or CEO Darshan Ruparelia at darshan.ruparelia@starcapmgt.com
[1] https://documents1.worldbank.org/curated/en/199811618928307743/pdf/Estimating-the-Gainsfrom-International-Diversification-The-Case-of-Pension-Funds.pdf
[2] As an aside, albeit an important one: all occupational pension schemes are private regardless of the public/private status of the sponsor. This is because the pension scheme represents the assets of private individuals.
