The changes to Regulation 28 of the Pensions Fund Act confirmed last week by the Financial Services Board (FSB) have been largely welcomed by local asset managers. The offshore investment limits for pension funds have been increased from 5% to 10% for the rest of Africa, and from 25% to 30% in the rest of the world.
“I think it’s very positive, especially for retirement funds with long-term investment time horizons,” says Quaniet Richards, the head of institutional at Nedgroup Investments. “It’s a fantastic opportunity for them to diversify their portfolios.”
Darryl Moodley, the head of investment consulting at Sygnia Asset Management, says that the industry has been engaging with Treasury for some time to have the limit increased. The change is therefore welcome.
“The South African market comprises a small fraction of the opportunity set of investments available globally, and in an increasing globalised environment, the greater flexibility will enable funds to improve diversification within their investment portfolios; increase exposure to global companies, themes and trends that are not directly available in South Africa; and improve risk management and protect against extreme outcomes in South Africa,” Moodley says.
The greater choice this gives local fund managers and investors must however come with greater responsibility. Exchange-traded fund (ETF) strategist and adviser at etfSA Nerina Visser points to how, for example, very poor investment decisions have been made in the past when advisors, investors or fund managers externalised money based purely on movements in the currency.
“There is so much evidence of investors increasing offshore investments after a period of sharp currency weakness, and no desire to do so once the currency has strengthened,” she points out.
“It’s not about timing the currency, its about the desired investment outcome,” he says. “To time the short term is very hard, and I think the best is to focus on your required outcome and required mandate and ignore the short term volatility in the rand.”
Some South African financial advisers have also been guilty of rushing to externalise their client’s assets based on perceived local political or economic risks, without proper consideration for all of the factors involved in making that decision. Particularly if their clients are going to retire in South Africa and their future liabilities are therefore mostly going to be in rands, they are simply substituting currency risk for other risks in their portfolios.
It’s therefore important for investors to bear in mind that the new limits are not an indication of an optimal asset allocation. The decision about whether or not to invest more offshore should be based on a lot more than simply how much is allowed.
“I don’t think it’s as simple as saying that the allowance has gone up, so let’s immediately increase our offshore exposure,” says Paul Hutchinson, sales manager at Investec Asset Management. “I think there are a number of factors that anyone would need to consider.”
These include the valuations of different asset classes and where we are in the market cycle.
“Portfolio managers need to be making judicious investment decisions,” Hutchinson says. “We already have multi-asset funds that allow the managers to invest across asset classes and geographies, but in order to do that they need to have the people and research capabilities in place to make those decisions.”
While active managers will now have greater flexibility in their asset allocation, but it’s also worth considering how passive managers who make use of largely static asset allocations will react.
Visser says that etfSA will be reviewing the strategic asset allocation of its retirement annuity portfolios and making adjustments where they believe it is appropriate. Sygnia will be doing the same.
More efficient outcomes
“For portfolios with a long-term horizon, traditional portfolio construction methodologies suggest that a global allocation of 30% to 40% results in more efficient outcomes,” says Moodley. “We would agree that the 30% limit is closer to our ideal offshore allocation and would certainly utilise the full 30% allowance when we deem the outlook and valuations of the various offshore markets to be attractive on a relative basis.”
That is however not the case at the moment, as Sygnia believes that prospects for South African risk assets are better now than in other global markets. They will therefore be keeping their offshore exposure below 25% for the time being.
In its more conservative funds, however, Sygnia is less likely to move more assets offshore.
“For portfolios with a low to medium horizon, where the management of risk and short-term volatility is critical, it is unlikely that we will utilise the full 30% offshore allowance,” Moodley adds. “However this would depend on the prevailing market conditions. Currently, we are comfortable with a exposure remaining below 20%.”
Where investors are unlikely to see any changes, however, is in the exposure that funds have to the rest of Africa. Even though the allowance has been doubled from 5% to 10%, exposure will remain limited.
“There are very few retirement funds currently utilising the full 5% allowance, and it is unlikely that this will change on the back on the increase,” Moodley says.