FSB confirms change to Regulation 28

Will collective investment schemes follow?
Institutional investors will now be able to invest a greater percentage offshore and into the rest of Africa. Picture: Shutterstock

In presenting the budget last week, Finance Minister Malusi Gigaba announced that the offshore investment allowance for institutional investors would be increased from 25% to 30%. At the same time, the allowance for investments into the rest of Africa would also increase by 5% to 10%.

These changes were immediately confirmed by the South African Reserve Bank (SARB). It issued an exchange control circular on Wednesday confirming that the foreign investment limits had been revised upward.

Effectively this means that asset managers and pension funds can now take a greater portion of their asset pool offshore. Firms like Allan Gray that have had to close their international funds to new investment as they had reached their limits, will therefore be able to open them again.

Co-head of fixed income at Investec Asset Management, Nazmeera Moola, believes that the timing of this announcement was very astute.

“We’ve had 14 months of massive inflows into emerging markets, and while they have become a bit more volatile, the expectation is that there will still be significant inflows this year,” she explains. “If South Africa is embarking on structural reforms it now also becomes one of the most attractive of these emerging markets, so we are likely to see increased inflows, especially into our equity markets.

“In that environment opening up limits for local funds to invest offshore, allows them to diversify, but leans against those inflows a bit and mitigates against rand strength,” Moola explains. “So I think it’s a clever move.”

Regulation 28

The change to the offshore investment allowance also immediately causes a change to Regulation 28 of the Pension Funds Act. This sets the asset allocation limits for individual pension funds.

“From a regulatory perspective, Regulation 28 changes automatically as the offshore limits are linked to whatever the Reserve Bank publishes, unless the Financial Services Board (FSB) prescribes a different percentage,” explains senior policy advisor at the Association for Savings and Investment South Africa (ASISA), Adri Messerschmidt.

The FSB has however confirmed that the new offshore allowances will apply. The regulator’s deputy registrar of pension funds, Olano Makhubela, issued a circular on Friday affirming that pension funds may now “acquire foreign exposure up to the revised limit of 30% in respect of foreign portfolio investments, and an additional 10% in respect of foreign portfolio investments in Africa”.

This will be welcomed by many commentators who have felt that Regulation 28 is forcing investors to be over-exposed to South African-specific risks. However, Messerschmidt points out that a change to the asset allocation limits does not mean that all funds will immediately increase their offshore exposure.

“There are still a number of principles in Regulation 28 about how investments must take place,” she points out. “The requirements like due diligence, risk assessments and asset liability matching are still in effect. Just because the limit has increased, doesn’t mean you can automatically increase your foreign exposure. You have to consider it within those principles.”

Will collective investment schemes follow?

It’s also important for investors to note that although the change to Regulation 28 takes place immediately, this does not affect South African unit trusts. For the moment at least, they are still limited to having 25% of their portfolios invested outside of Africa.

This is because the asset allocation limits for collective investment schemes are set separately through the ASISA fund classification standard. South African portfolios – whether multi-asset or equity funds – must have at least 70% of their assets invested in South Africa, with a maximum of 5% in the rest of Africa and 25% in the rest of the world.

This does create some conflict as many retirement products, particularly retirement annuities, make use of Regulation 28 compliant unit trusts. It therefore makes sense for these funds to have the same asset allocation allowance as pension funds.

Messerschmidt says that ASISA has already called a meeting on Wednesday to look at this.

“There is a mismatch at the moment, so our fund classification standing committee is meeting this week to consider how to update the fund classification standard,” she says.

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50/50 split pleae

Why even have ratios? In my opinion the money should be invested wherever the best possible return can be achieved. If the government wants a greater share of that money to be invested locally, then they must ensure that the country is well run so that it will attract capital.

I know right :/

The concept of a free market goes completely out the window when I am forced by regulation to invest a whatever percentage here, that money could have gone to much more deserving emerging markets, instead things like Steinhoff inevitably end up in your RA because there is only so much to go around, and then companies that don’t deserve their evaluations get massive, thanks to everyone that essentially turn into forced buyers.

So it doesn’t apply to balanced funds immediately, what about self constructed Reg 28 compliant portfolios in RAs? Is that just a case of the providers systems?

You should be able to construct your own reg 28 compliant RA from a mix of foreign and local equity, property and Fixed income funds.

I know, it is constructed already, my question is do I just have to wait for the providers to adjust their systems? If I do an online instruction, if will not allow Non Reg 28 compliant changes to be submitted.

It is already implemented on the Allan Gray RA platform.

Thanks TryingToRetire

Will someone please tell ASISA there’s nothing “to look into” – just re-align their totally unnecessary “own” set of rules for Regulation 28 – and simply align it with the Regulation itself so that as the Regulation is changed everyone sings from the same “hymn sheet”!

Follow CR’s lead – Zexit has happened – time to focus on trimming governance costs by eliminating duplication of effort in the regulatory space!

Its a mandate issue. Funds had to have a specific mandate (max 25% and max 75%) in order to be considered a Reg 28 compliant fund. They will change these limits, however they need to change fund mandates, which requires approval from investors as it is a unit trust, which takes time, which blah blah blah…..

So technically only investors directly can take advantage (at the moment) through investing more into direct offshore funds in their compulsory funds, or moving more offshore through asset swap in their direct share portfolios within an RA or preservation.

Thanks Charles – just further proves my point … lack of proper thought even in the construction of the fund mandates. Why not simply have a mandate which undertakes, at all times, to be compliant with Reg 28 itself – instead of restating aspects of Reg 28 at a given time within the mandate!

Reg 28 itself was smart enough to simply make reference, on this point, to the offshore component allowed from time to time by the Reserve Bank.

I am simply appealing for a little “lateral thinking” – instead of all the “tick-the-box” stuff that pervades the investment industry!

Every one cent invested offshore since late 2015 to date, lost a lot of money on their offshore investments…the USD/ZAR is enroute to at least 10…all the offshore investments that left under Zupta will come bck in the form of a Wall of Money, and the ZAR will respond!

True, I will just adjust my monthly RA contributions to 30% of my strengthening Rands goes into the overseas Feeder Fund/s. I wont rush and adjust the current fund values around.

@ Ask me I know. Some unit trust performance, offshore versus local.

Old Mutual Global A 24/12/15 = 2374.47 cpu
Old Mutual Global A 16/02/18 = 2505.81 cpu

Old Mutual Invest R 24/12/15 = 41881.74 cpu
Old Mutual Invest R 16/02/18 = 41382.82 cpu

Now doubt there is variability in other selected funds based upon individual manager performance.

Personally I like the offshore diversification up to at about 30% offshore via direct or roll-up funds. Not only currency but better offshore managers. SA has simply run out of sufficient capable asset managers.

Of course one can wait for Wakanda/Black Panther and do even better keeping your bucks in SA.

Ask me I know.

End of comments.

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