For many South Africans, saving for retirement is a lifelong journey, one that involves steadily converting human capital (their ability to earn a salary) into financial capital (their pension savings). This delicate process, often unfolding over decades, ultimately determines the comfort and dignity of retirement. Pension fund trustees, as stewards of these savings, carry the enormous responsibility of making that financial capital work as hard as possible.
In this context, it becomes critical to not just ask what is held in a retirement portfolio, but also how that capital is used. It’s the difference between portfolio holdings and effective exposure – a distinction that, once understood, can open the door to innovative investing through strategies like portable alpha.
Before we unpack this idea in a practical and approachable way, let us consider the limitations of a traditional approach.
The limitations of a traditional approach
Most retirement portfolios today are built using a “buy and hold” approach. This means pension funds allocate capital to a diversified set of assets – local equities, global bonds, property, and so on – with the goal of earning returns over time. This is simple, understandable, and for the most part, reliable.
But it’s also capital-intensive. Every rand allocated to one asset class cannot be used elsewhere. For example, if you allocate R100 million to South African equities, that capital is “tied up” in that single exposure. There’s no room to simultaneously gain exposure to another return source – say, a global equity strategy – without recalling the original investment.
In a world where every rand matters, particularly when retirement savings are being built slowly over time from hard-earned salaries, this can severely limit opportunities.
Understanding effective exposure
Here’s where the concept of effective exposure comes into play. While traditional portfolios are often thought of in terms of holdings (where is the capital physically sitting?), more advanced strategies ask: What am I actually exposed to? This subtle shift in thinking allows for much greater efficiency and greater opportunity sets.
By separating where the capital is held (for instance, in a low-risk local instrument) from where the return is being generated (through exposure to another return stream), it becomes possible to create portfolios with multiple return streams. These portfolios use capital more efficiently – unlocking “two-for-the-price-of-one” exposure.
This is the essence of portable alpha.
Portable alpha: A smart way to stretch capital
Portable alpha is a strategy that allows pension funds to generate return (the “alpha”) from a source independent of where the capital is invested. This is typically achieved through the use of unfunded instruments or overlay structures that create exposure to an additional strategy without having to physically move the underlying capital. Think of it like renting out your backyard to a landscaper while still living in your house. You don’t need to move out to earn extra income – your space is working double duty.
Applied to retirement portfolios, this allows trustees to keep capital invested in, say, low-risk domestic bonds or cash instruments (supporting the local economy, providing liquidity, and meeting duration needs), while simultaneously gaining exposure to global equity markets via these innovative overlays. The result: two sources of return from one pool of capital.
This approach doesn’t just stretch return potential – it also creates opportunities to manage risk better through diversification, especially in a constrained or volatile investment environment.
A real-world analogy
Let’s say a pension fund member earns R20,000 per month and contributes diligently toward their retirement. That contribution is a slice of their hard-earned human capital, now transformed into financial capital. Wouldn’t it make sense to ensure that each rand of that contribution is pulling double duty? Especially if the investment risk is adequately contained? Imagine going to a store and finding out that, for the same price, you could get two high-quality products instead of one. That’s what portable alpha effectively does for retirement savings. It respects the sacrifice and effort behind each contribution by ensuring it’s used in the most capital-efficient way possible.
Additional benefits for trustees to consider
Portable alpha strategies don’t just provide return enhancements – they come with a host of practical benefits, especially for pension funds operating under tight cost constraints and governance standards:
Cost efficiency: Leveraging technology, systematic strategies, and overlays often comes at a fraction of the cost of traditional methods, allowing savings to be passed directly back to members.
Local economic impact: By keeping the underlying capital in local, currency-hedged instruments, these strategies can avoid capital flight, support local capital markets, and promote financial sector stability.
Diversification without complexity: Trustees get access to global strategies and alternative return sources without physically moving capital abroad or taking on unnecessary currency or liquidity risk.
Scalability and transparency: Systematic portable alpha approaches often rely on rule-based models, offering greater predictability and governance clarity compared to subjective or discretionary methods.
Why this matters now
As more pension funds embrace the flexibility allowed by increased offshore limits, the temptation is often to think in binary terms: “local vs offshore” or “risk vs safety.” Portable alpha shows that this need not be a trade-off. By shifting the focus from where capital is placed to what exposure is achieved, trustees can begin to rethink how to build resilient, diversified, and capital-efficient portfolios that serve members over the long term.
For pension fund members working for decades to build a comfortable retirement, this approach can be both practical and fair but ensuring that every rand they’ve converted from hours worked to capital saved is used as effectively as possible. And for trustees, adopting strategies like portable alpha represents a modern, responsible, and intelligent way to maximise outcomes without compromising prudence.
