Optimal Asset Allocation Strategies for South African Pension Funds

J D van Heerden and F J Koegelenberg

Studies in Economics and Econometrics, 2013, vol. 37, issue 1, 29-53

Abstract: In this article we investigate whether it is optimal for South African pension funds to allocate the full twenty-five per cent 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 out-perform 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 per cent foreign exposure that significantly outperform their domestic-only counterparts while the remaining three are indifferent between domestic-only or foreign-allocation portfolios.To compare the seven asset allocation optimisation strategies, the frequency of out-performing four pre-defined benchmarks was calculated for each of the portfolios over each of the three investment periods. 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.

Date: 2013
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DOI: 10.1080/10800379.2013.12097248

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