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Part 2: JSE versus the S&P500

The impact of Regulation 28 on your future wealth and trends to watch that should guide investment strategies.

One also needs to include a comment or two about Regulation 28, the regulation contained in the Pension Act that determines how much of your pension money can be invested in offshore markets, currently capped at 25%. Don’t expect much commentary or criticism on this limitation from the investment industry. It’s a case of don’t rock the boat and don’t attack the regulator as it could be career-limiting.

But the reality is that by restricting how much of your pension funds can be invested into offshore markets your investment returns over time have been and will be affected quite considerably.

Treasury has done a very good job, although deeply flawed, in attacking the investment industry and the effect of fees on investment returns. In doing so it has pretended to be the good guys when it comes to the investment industry.

I would suggest that a similar study will prove that Regulation 28 has a far more damaging impact on your future pension. The restriction — essentially driven by exchange control policy and therefore a political imperative — is proving to be very costly. With our market moving sideways and barely beating the inflation rate over the past three years, most of the growth in pension funds has come from the offshore exposure in portfolios. 

I would challenge Treasury and its acolytes in the investment industry to justify this restriction on greater offshore exposure. Over the longer term this regulation is reducing your pension fund by several percentage points per year, much more than the hypothetical reduction in returns as a result of fees, as it often claims.

Yet, when you retire you are allowed 100% exposure within your living annuity.

Shouldn’t it be the other way around?




By writing this I am not making a prediction. Most predictions tend to be wrong, but trends on the other hand tend to last much longer than most think. They also don’t change over the year-end. Much of what could happen in 2017 will merely be a continuation of what happened in 2016 and the years before.

The biggest trends today as far as investments are concerned and which should guide investment strategies are as follows:

  • The US dollar is still in a rising formation. This trend is likely to be boosted by the accelerated increase in US short term interest rates. This could cause a huge suction effect, drawing money out of emerging markets, particularly ones with structural defects, such as South Africa, Turkey and Brazil. This money will flow back to the US.
  • The United States has regained its position of the economic powerhouse of the world. Despite the anti-Trump rhetoric from the liberal press I reckon that The Donald could surprise the world with his economic policies.
  • Trump has signaled that he intends using fiscal policy as his main economic growth weapon. China, too, over the Xmas break announced a $300 billion investment programme to rebuilt its railway infrastructure.
  • Money flows to countries that welcomes and appreciates foreign investment.  The ANC has geared up its anti-west and anti-business rhetoric in recent years. It’s no surprise that those with the money have elected to deploy it elsewhere…
  • This even goes for the local business community who, with R1 trillion in cash on their balance sheets, have elected not to invest or rather invest in other parts of the world. Why should you, dear investor, feel obliged by feelings of patriotism to invest in the local market, when the big boys are not. Misplaced patriotism is not going to feed you ten to 15 years down the line.
  • It’s still too early to determine if the recent uptick in commodity prices is the start of a new trend. Some analysts suggest that it will take another ten to 15 years before we experience the next truly global commodity rally again. Take heed as South Africa’s fortunes waxes and wanes in line with the commodity sector.

Until this changes, my own personal wealth will remain fully exposed to offshore markets, despite the short term volatility introduced by currency fluctuations.

Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at for ideas and suggestions.



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Very good point re patriotism and investing at home when conditions here are purposely sabotaged for non BE types by the ruling cabal

I’d be ok with the offshore portion in retirement products limited to 50%, 25% is indeed too low in my opinion.

So given that it isn’t like that, my TFSA will be 50% local and 50% foreign (R30 000 per annum), and my discretionary investments above that will be 100% foreign (even if only in feeder funds).

And my Pension Fund and RA will be as per Regulation 28.

Please account for contribution tax relief as well. People whose annual earnings are between R700 000 and R1.4 million, gets a relief in excess of 30% i.e. only paying 70% of the contribution. The 30% saving is the risk free rate of return, the question begging is the short term remark of currency pressure being alpha?

Is short term return Bart of the Future … hindsight, foresight, blindsight…

So perhaps a tax wrapper holistic offering is the order to understand i.e. Wrapper risk free rate of return + market risk free rate of return + beta = Alpha.

i agree that the cap should be removed, another suggestion is to cap the contribution rather than the investment. this will remove the need to sell off foreign investments as the local market lags.

Treasury uses regulation 28 as a tool to ensure a big enough pool of lenders for government borrowing. Pension funds are forced by law to “invest” a minimum amount in government bonds for the “safety” it offers. Government is in fact forcing citizens to lend it money. It is the constant stream of pension money that enables overspending and maladministration by government employees.

The bottom line is – if you would not lend to the individuals in Luthuli House in a personal capacity, how on earth can you buy a government bond in your pension fund, and think it is safe?

Regulation 28 is nothing but expropriation. It is the partial nationalization of pension funds.

Regulation 28 is simply a form of exchange control: that is entirely correct. The future exchange rate, interest rate and required return on a SA investment are all intimately linked with the country’s risk profile(currently high, thank you ANC).

The purpose of exchange control is to lower investment returns (including interest rates) by interfering with this relationship i.e. prescribing South African investments for pension funds.

Without this interference in the free market, interest rates would be much higher(for the same risk profile) and since equity and property compete with cash as an investment destination, so would returns on equity and property be much higher. Returns on property, for example, can be higher due to increased rentals or lower prices or both. Take your pick.

Magnus is simply looking at historical returns. The JSE should by rights outperform the S&P500 simply because its risk profile is so much higher (higher required return). The JSE is under returning because because of exchange controls. Exchange controls have been robbing future pensioners of future income. If there were no exchange controls the returns on the JSE would be commensurate with the risk (i.e. much higher)and there would be less incentive to diversify.

Doing away with exchange controls would cause a big drop in the index as funds are withdrawn from the over-valued JSE and invested elsewhere. The JSE returns would then be hgiher and fair for the risk.

No mention of the performance of the JSE vs S&P 500 vs PSG vs the value of a Mercedes?

At the moment the Dow Jones Industrial Index in real terms (measured in ounces of gold to buy the index) is still more than 50% below the high formed during the year 2000. So, it takes 2 Mercedes to buy the index now, if it took one Mercedes to buy the index in 2000.

If you could buy a Mercedes with your holdings in the All Share Index during the year 2010, you can now buy half a Mercedes with the same portfolio.

Since 2010, the JSE All Share Index (in terms of the USD) lagged the performance of the S&P 500 Index by 57% but from the year 2000 to date, the All Share outperformed by 100%.

What we can derive from this is that Zuma is bad.

LOL – can see you still on holiday – take it lightly

Local JSE MidCap sector did over 20% last year (AshMidCap ETF). Not all doom and gloom here.

End of comments.



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