Privacy Policy
We use cookies to give you the best experience of our site. Please read our full privacy policy. close

Legal Disclaimer

This website specifically caters for fiduciaries, financial intermediaries or people working in institutional financial services industry.

By accepting the terms and conditions you confirm that you are a fiduciary, financial intermediary or work in the financial services or investments industry and require information regarding industry, economic or legislative updates, or information on Sanlam Investment’s products and solutions.

This website provides information on Sanlam Investments’ products, the markets and our services in general. This website is not intended for retail investors and we recommend that you seek financial advice from a financial advisor to conduct a proper financial needs analysis to ensure that our funds are suitable for your investment risk profile, financial needs and goals.

You may not reproduce, modify or create derivative works from, publish, distribute, transmit, display, license or transfer any of the content contained on this website, unless you have obtained our prior written authorisation. The website and all its content (text, graphics, icons, hyperlinks, private information and designs) are owned by or licensed to Sanlam. As such the intellectual property rights in the content on this site are protected against infringement by local and international legislation and treaties, and may not be used in any way without our or the licensor’s consent.


Regulatory Reform

White Paper: Estimating future foreign asset returns in Rands via convolutions

Article Image
home »

White Paper: Estimating future foreign asset returns in Rands via convolutions

Article Image
home »

White Paper: Estimating future foreign asset returns in Rands via convolutions


Article Image

Executive Summary

Recent changes to Regulation 28 have had definite impacts on the investment landscape, with investors (both institutional and retail) now able to increase their offshore asset allocations from 25% to 30%. This opens up questions about exactly how much investors should allocate offshore and where they should invest their money.

Our aim is to provide a framework where investors can evaluate these questions while considering exchange rate views in their portfolio construction process. In doing so, we primarily consider the perspective of an investor who intends to invest offshore, but receives returns in Rands.

Assessing investment opportunities for foreign asset classes is often based on their performance, measured in local currency. This is usually done by multiplying the historic foreign returns with the relevant exchange rate, and then using these domestic returns as the basis for making future asset allocation decisions.  This paper shows how using the traditional method as the basis for foreign asset allocation can be misleading.

There are additional considerations that investors may miss when making decisions about how much and where to invest offshore when the traditional method is used. 

In contrast to this, the convolution method used for determining foreign asset performance in local currency allows investors to consider three distinct factors:

  • The varying returns of the foreign asset.
  • The currency fluctuations when converting to domestic currency.
  • The dependency structure (e.g. correlation coefficient) between the foreign asset and the exchange rate in question.
  • Ultimately, this report aims to show that investors should make use of a convolution method to incorporate these three elements correctly when making robust decisions regarding the assessment of foreign opportunities. Our analysis will show that using the convolution method enables consistent views for an asset management firm, where the team responsible for working on foreign exchange rate distributions (e.g. for pricing derivatives or trading) can share their model with the asset allocation team, supporting a consistent house view when making asset allocation decisions.

Jaundré Scheltema talks us through the detail.

Download the printable white paper below.

Download White Paper Arrow

A detailed breakdown of the statistical and mathematical background to convolutions is provided here:

Download Appendix Arrow
Print Friendly

Leave a Reply

Your email address will not be published. Required fields are marked *

intelligence logo

2016 Award

Connect With Us

Twitter LinkedIn Soundcloud Soundcloud

Leave a Reply

Your email address will not be published. Required fields are marked *

Read This Next
Sanlam Alternative Multi-Strategy
How to invest meaningfully into Africa

The opportunity set that exists in Africa presents investors with a sufficiently broad universe to bring positive, risk-adjusted benefits to...
Read More