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Is Regulation 28 too restrictive?

Asset managers have their say.

Last week Moneyweb looked at the impact Regulation 28 may have had on investment returns since 2011. It was a very simplistic analysis, but given the JSE’s sluggish performance against other global markets over this period, it was clear that investors could have missed out on returns that were available offshore.

Read: The impact of Regulation 28 on returns

It would, however, be wrong to take this as conclusive evidence that there is something wrong with Regulation 28, or that it is unfair to investors. It is, after all, a backward-looking analysis over a relatively short period of time.

Investors who are saving for retirement are generally not doing so over eight years. They have much longer time horizons.

Where we’ve come from

“It’s quite easy to assume that whatever has happened over the last 10 years is what you extrapolate into the future,” says Sangeeth Sewnath, deputy MD at Investec Asset Management. “If you do that, you would say that investing more in offshore equities would result in a better outcome for investors. But if you look at a far longer period – and we have access to over 100 years of return data – South African equities have outperformed global equities in rand terms.”

One should therefore be cautious about drawing definitive conclusions from short-term figures, particularly given the South African environment.

“We’ve had the Zuma years, state capture, all the cabinet reshuffles – and this has led to negative sentiment towards South Africa and South African equities,” says Quaniet Richards, head of institutional at Nedgroup Investments. “But in 2010, was anyone saying that you should have more offshore exposure, or take all of your money outside of South Africa? Not really, because we were in a bull market on the JSE.”

While it’s undoubtedly true that recent performance has been the catalyst for a debate around the Regulation 28 limits, that doesn’t mean it doesn’t deserve consideration. As Fred White, head of balanced funds at Sanlam Investments, points out, regardless of the sentiment towards South African markets, there are key reasons why investors should want to invest offshore, but they are being restricted in their ability to do so.

Where we’re going

“The asset spreading requirements of Regulation 28 are intended to ‘diversify’ pension fund assets,” says White. “However, the limited allowable foreign exposure results in investors getting suboptimal opportunity to truly diversify.”

By being compelled to invest at least 60% of their portfolios in South Africa, local investors have to be highly exposed to the local economy. However, at different times, growth may be much stronger elsewhere.

Global business trends may also not be adequately represented on the South African stock market. The most obvious example of this is the tiny selection of tech stocks on the JSE.

“In our own lifetime, consider the incredible penetration of technology into our daily lives and into our budgets and wallets – and mirroring that, the rise in invested assets that have benefitted from the growth in tech-related shares,” says White.

“An increasing number of South Africans are making use of Amazon, Uber or Apple products, yet we can’t access the potential returns of these sectors in a free, unlimited fashion.”

One size fits …

It’s also worth remembering where Regulation 28 comes from. It was originally written to set how pension funds at an overall level could invest their assets to ensure that they were not taking on too much risk.

“Then, in one quick change, it was applied to RA [retirement annuity] funds at a member level, without any change to the rules,” says Pieter Hugo, MD of Prudential Unit Trusts. “In other words, it seems like we’re applying fund rules to individual members. This may or may not be appropriate for individuals.”

It is, of course, impossible to apply a general rule that is going to be perfectly appropriate for everyone.

“Some people, given their financial position, should probably have 60% offshore, and others in a different position should have 10%,” says Rob Spanjaard, chief investment officer at Rezco Asset Management. “But on a broad average, the 30% that Regulation 28 allows is about right.”

This is a notable acknowledgement from a fund manager who is known to be one of the most active when it comes to asset allocation in the balanced fund space. The Rezco Value Trend Fund has been among the top long-term performers in the multi-asset high equity category for many years, and its overall asset allocation has at times shifted dramatically.

In January 2016, for example, the fund had almost two thirds of its assets in cash. Very few, if any, other funds take their asset allocation to such extremes.

Spanjaard, however, says that even over the last five years he hasn’t felt overly restricted by the 30% offshore limit.

“We push up against the maximum occasionally in terms of risk asset exposure, but we think the limits are probably in about the right place,” he says.

Risk and return

It’s also vital to consider that a retirement portfolio is not simply about maximising returns. It needs to be about reaching a particular objective.

A rough rule of thumb is that for anyone to have saved enough to be able to sustainably earn an income of 70% of their final salary, they need to have generated a return of 5% above inflation over the entire period that they contributed to their retirement fund. That is below the long-term average of 7% above inflation that both local and global equities have delivered in rand terms since 1930, according to work done by Old Mutual’s MacroSolutions boutique.

This means that investors don’t need to take the risk of being fully exposed to equities, and particularly the risk of being highly exposed to offshore markets.

“The volatility of offshore asset classes is the highest because you bring in currency risk, and the rand is so volatile,” says Richards.

Some measure of balance is therefore always required. The authorities have also shown their willingness to increase the offshore limits over time. Most recently it was upped from 25% to 30%, and many people expect it will be moved further.

“Ultimately, the Regulation 28 restrictions should be relaxed over time,” Sewnath believes. “They have been relaxing them already, and that has improved the quality of the outcome that investors get, given that you have lower levels of risk for similar levels of return.”

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Limits to offshore are one thing, however I believe that the limits on total equity are the real problem. IF one believes in markets going up over time, at least over the medium to long-term, one should be allowed to fully invest in risk assets. There is huge opportunity cost limiting someone who still has 30 plus years left till retirement and actually beyond. I for one am so grateful for my grandfathered RA that is still 100% in equity funds. it may have under-performed this past 5+ years, but I am fairly confident that it will out-perform my restricted Reg 28 RAs in the future. In addition I have a 401k in the US that is totally unrestricted…why do we need restrictions here. What we need is good education and advice and there are many good IFAs around to provide this. Reg 28 is doing me a dis-service!!!

Two other aspects to consider on the broader Reg 28 regs and their impact:
1/ Many, many UT funds limit themselves to Reg 28 requirements (e.g. Balanced Funds) while the majority of investors in these funds are not in retirement products. This is a disservice to these ‘other’ investors, and
2/ There is no requirement on investors to invest even a portion of their portfolio in ‘risk’ assets. As a result a number of investors are 100% in money market or income funds to their detriment. So the regulations limit volatility risk but do nothing for inflation risk.

Yield on govt bonds are 8.5%+.
As long as thats the case money will not flow to equities in great volume. Also thats not a bad return on investment in the current climate.
Dont disregard bonds and cash. They have their place and they have their moments when you need to have them in your portfolio.

If we are discussing Reg28 we should also please consider other aspects of the Regs. This would include for example the strong bias towards “listed” products.

Has this requirement been net beneficial for the industry and for our pensions?

Its difficult to see the benefits given there is only 1 listing platform and we are all beholden to the JSEs costs. Most products are marked at par or on a rickety “last traded price” basis, difficult to see how this helps. And then there is little oversight and no secondary market … what are we paying for?

The restriction to a total of 75% equities the real problem. It is such an opportunity cost to limit someone who has decades left of the working life and life for that matter. I for one am very thankful for the grandfathered RA I have with 100% equity funds, it will outperform over the long-term compared to my restrictive Reg 28 RA. I also have a 401k in the US that has no restrictions, so why are we self-harming ourselves in in SA, it makes no sense!!!

If you don’t like the reg 28 restrictions put some discretionary money into another instrument.
Reduce your retirement fund contributions if necessary – you are defering, not escaping the tax on that side anyway.

75 % equity more than enough for me. 30% offshore is too low so I’ve rebalanced accordingly by running a blend of a reg 28 and offshore 100% equity and non ZAR cash. There is a 10M annual offshore allowance (for now, how long will it last?) so most people have no reason not to.

This is what I do as well using other vehicles, like tax free savings, to increase exposure to global equity and property assets.

Patrick – Magnus Heystek has strong opinion about this, did you canvass his views?

Look, the biggest threat to the purchasing power of our pension funds is Luthuli House itself. Does anybody really believe that the government is acting on our best interest with Reg.28? If they really cared about us, they would make a law that forces pension funds to invest 100% offshore! No, my friends, when the government tells you they are acting in your best interest, then you know you are being taken for a ride.

If the government was really worried about your savings, they could simply lower the tax rate, respect your property rights, control the crime rate, stop the redistributive municipal tax regime, stop the looting, lock up thieving cadres and scrap BEE codes. They tell us that the purpose of Reg. 28 is to protect us against currency fluctuations and a crash in the offshore markets. The truth is, that at the moment, our credit rating hangs on this Reg.28 thread. This law ensures a pool of local savings, a percentage of which is invested in government bonds. According to Moody’s “our government debt is denominated in local currency and there is a large pool of local savings”. These local savings that are invested in government bonds affords us a credit rating at the moment. Your money buys us a credit rating! If Moody’s walks away, the ANC will try to implement Prescribed Assets. Can you imagine how “safe” your savings will be when you are forced to lend 80% of your money to Luthuli Hose?

In short, Reg.28 is a parachute that saves Luthuli House when we go over the fiscal cliff, and this parachute is manufactured out of your money.

To illustrate by example (there will be other better examples):

Use the tool at

In the last 10 years ending 23-May-2019 accumulated growth:

AGBF – 177% (Reg28)
AGEF – 200% (SA Equity)
AGOE – 303% (Global Equity)

Not much risk in any of these funds without considering looter house.

Smartly put Sensei,

Tell anyone from the civilized world that in SA you can only put 30% of your retirement money offshore . They will tell you it’s a human rights abuse.

Regulation 28 talks about maximums, but there is no focus on minimums. For those investors with 10+ years to retirement, there should be a minimum equity exposure that you should be forced to have – more likely to achieve your goal of having more money at retirement

In October, when I wrote about what Reg 28 is doing to your pension fund values, I was body-slammed by Patrick, basically saying I am talking shyte.
But you can only ignore the facts for so long….

The reason for reg 28’s existence is to prevent people from investing in overly aggressive funds with their compulsory retirement funds. So how is this for stupidity. A young person who has 30 years to go to retirement has to abide by reg 28 but as soon as a person retires, they can invest in any funds they wish, no matter how aggressive, with no limits. Reg 28 is no longer applicable post retirement. Very poorly thought out.

Patrick, can you clarify “South African equities have outperformed global equities in rand terms”

Does that mean that if you invested 1000 pounds in 1919 in each of JSE and LSE indices, that the LSE index would now, even multiplied by 18 or whatever, be worth less than the JSE?

Hi Patrick.

Over the last 100 years SA hsd gold. Thats what drove the jse.

We dont have those reserves anymore and we absolutely do not have the same sympathetic political climate for miners to operate within either.
There are SA sectors I personally like and invest in yet fact is so long as the socialist-communists stay in charge the index will struggle against global peers so the most dangerous assumption is that the past 100 years is reason for optimism. The fundwmentals are (near irrevocably so) completely changed.
The ANC have already succesfully ejected us from the 1 trillion dollar club, and falling still.

Which is why I will disagree that Regulation 28 is not going to cause a lot of pain for the current generation of retirement savers.

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