You are currently viewing our desktop site, do you want to download our app instead?
Moneyweb Android App Moneyweb iOS App Moneyweb Mobile Web App
Join our mailing list to receive top business news every weekday morning.

The Regulation 28 debate ignores a crucial point

‘Surprise! The returns reported by mutual funds aren’t actually earned by mutual fund investors.’ – John C Bogle.
The benefits of full exposure to growth assets are really only enjoyed by a handful of investors who are able to stomach the volatility associated within the market, the author writes. Picture: Shutterstock

I have been following the debate around the issue of Regulation 28 over the past week, and as with every other flare up of this debate, I am disappointed. It tends to centre on issues of expected return and the supposed prejudice of younger investors who should have a lot more exposure to equities. The debate has of late focused on the relatively low exposure to offshore assets.

Read: Is Regulation 28 too restrictive?

When considering the reasons for people retiring with insufficient capital, underexposure to equity and offshore does not feature high on the list.

According to a 2017/2018 Sanlam Benchmark Survey and other research, individuals retire with insufficient capital because:

  • They started investing for retirement too late (and were unable to benefit from compounding)
  • They cashed out their retirement savings every time they changed jobs (again, interrupting the power of compounding)
  • They invested in expensive retirement and investment products (compounding worked against them as they contended with high fees)
  • They saved too little
  • They did not seek proper advice
  • They are over-indebted and cannot commit to any form of savings or investments.

The issue of underexposure to equities affects a minority of investors; those who are investing for their retirement. And here the benefits of full exposure to growth assets (equities, listed property, offshore) are really only enjoyed by a handful of these investors who are able to stomach the volatility associated with them.

Read: The impact of Regulation 28 on returns

The oft-quoted Dalbar study shows that most US equity investors receive far lower returns (3.88%) compared to the market (5.62%) because of their behaviour. These figures were for the 20 years ending December 31, 2018.

Equity investors tend to sell after markets have fallen a lot, and buy back in after markets have delivered strong returns. So they miss out on all that extra return on offer anyway. Judging by local unit trust inflow and outflow statistics over the years, these behaviours are less pronounced with balanced funds (Regulation 28-compliant funds). 

The 2018 Dalbar study showed that equity investors remained invested for an average of 3.55 years while asset allocation (balanced funds) investors remained invested for an average of 4.59 years. So Regulation 28 may actually help investors stick to their investment strategy, but at a cost of some additional return (which investors may be foregoing anyway by their behaviours). 

Sector performance

1 year

5 years

10 years

20 years

SA Equity General

-8.8%

3.9%

10.5%

14.7%

SA Multi Asset High Equity

-3.6%

5%

9.5%

12.5%

SA Interest Bearing Short Term

8%

7.5%

7.3%

9.4%

SA Money Market

7.3%

7%

6.6%

8.4%

Inflation

5.2%

5.4%

5.4%

5.5%

Source: Profile Media

The table above shows compound annualised growth rates for the periods to December 31, 2018. The outperformance of equities over balanced funds (multi-asset high equity) was meaningful at 2.2% per annum. However, the research suggests that more balanced investors actually experienced those returns than equity investors. The higher volatility of growth assets triggers the bad behaviours that result in investors deviating from their long-term investment and retirement plans.

A trend that gives me confidence that this debate will fizzle out over time is the rise of passive balanced funds. These are cheap balanced funds with exposure to various asset classes, but cost a fraction of their actively managed counterparts.

The Nedgroup Core Diversified Fund has the longest track record of such a fund, and has outperformed the JSE All Share Index since its inception in 2009. The Satrix Balanced Index Fund and Sygnia Skeleton 70 Fund have achieved the same thing since their inception in 2013. A number of the large actively managed balanced funds have also outperformed the JSE since their respective inception dates. These include Allan Gray, Investec, Coronation, Prudential, Foord and others. Other more recent start-ups like Obsidian, ClucasGray and others have also achieved this.

The main problem with the traditional Regulation 28 debate is that investors are human while markets are not. Equity and offshore markets have delivered higher returns over time, but with high levels of volatility. This volatility triggers those destructive human behaviours, which result in investors achieving lower returns than the market. This phenomenon is less pronounced with Regulation 28 funds. It is also possible to outperform equity markets with the right strategy within the confines of Regulation 28.   

‘The fault, dear investor, is not in our stars – and not in our stocks – but in ourselves …’ – Benjamin Graham.

Craig Gradidge CFP® is an investment and retirement planning specialist at Gradidge-Mahura Investments.

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

COMMENTS   15

Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in to comment.

SIGN IN SIGN UP

Inflation at 5.5%?? Wow, that is optimistic!

According to a Benchmark Survey and other research, individuals retire with insufficient capital because:

They took the advice of the retirement industry!

Would you send your child to a school where only 3% of kids matriculate? No. Then why go to the retirement industry to retire when only 3% of people will ever do so successfully.

As for the youth of today there are so many reasons why they will never retire there’s hardly space here to go into them. By the time they are 60 there pretty much won’t be a planet anymore. Barely an economy and heatwaves, droughts and terrible weather.

The lower performance on the JSE, relative to the NYSE or NASDAQ over the past 5 years is not the biggest motivation to invest offshore. Irrespective of when they started to save, or the total value of those savings, rational investors want to protect those savings against the ANC. The JSE is not our main concern, Luthuli House is. It is becoming increasingly clear that it is impossible to invest in the JSE without being invested in Luthuli House as well.

The relative underperformance of the All Share Index, even when compared to our peers in the Emerging Markets, is an indication of the effects of ANC policies. Investors do trust local companies, they do trust the financial industry, they trust the JSE, but they do not trust Luthuli House. So, whenever we discuss regulation 28, we have to refer to Luthuli House. Regulation 28 is the umbilical cord that links Luthuli House to the crucial life-giving nutrients of the pension savings of citizens.

That sums it up completely. Past performance is not a guarantee of future performance. Trust is broken.

Good point and if regulation 28 effectively limits offshore investment it seems kind of self-fulfilling in that invested cash has to find a home in SA. This could drive up stock valuations over their actual global worth i.e. SASOL etc. Looking in the rear view mirror for SA going forward should only help us in predicting more ANC profligacy and looting and fuel the drive to flee offshore. Ramaphosa doesn’t care about SA investors; he’s going to rip them a new one EWC style and thinks he can sucker in replacements from overseas with promises it won’t happen to them. He’s pretty much said so.

This is historical fact and tells us about the past. The major issue is that the quality of counters on the JSE has deteriorated to such an extent that most are not investment grade any longer. I don’t believe what is available at present can be compared with 10 or 20 years ago.
There is also the constant one of shocks experienced almost on a monthly or is it weekly basis. Sasol AGAIN just a week ago. MTN might be the next in line AGAIN. Much rarer in the past.
What is the actual risk premium (Equity) for SA stocks. What are the chances of being compensated for trying to invest in a handful of stocks in an emerging market with dubious political credentials and stability over the next 10 to 20 years? No new proper counters. Some of the better ones are dumping SA.

I don’t believe it will compare to the previous 10 to 20 years. Remember to add the risk premium.

This then makes the aim of regulation 28 meaningless if the intention is to protect pensioners from risk.

Cheap foreign ETF (local) can even do the trick.

Inflation. The old word. With the introduction of quantitative easing, money printing, it lost meaning. Europe followed like expected. Japan can be seen as the system founder. To introduce it locally require iron discipline. For the obvious. Free flow can only be directed to the wealthy not in need for more. Propping up markets, the direct effect. Indirect, happy employees, praising the emperor. The E.U elections results, analyzed,did show many unhappy, but not money related. To introduce this print out of misery locally is a bridge to far.

The writer is trying to sugar coat Reg 28. Please don’t quote Sanlam, their investment products of the past gave these type of companies a bad name.

“The oft-quoted Dalbar study shows that most US equity investors receive far lower returns (3.88%) compared to the market (5.62%) because of their behaviour.”

Really? Investors are are the market. Who got the rest of this return????

Warren buffet

Not sure what the scope of that benchmark survey was – but it certainly didn’t go up a level to say that the financial services industry’s shift from supporting Defined Benefit to Defined Contribution schemes was a massive contributor.
If you are not in the lucky half employed by the state, just take a look at the Govt. Employees Pension Fund calculator online to figure out how much better off you would be in that scheme than your defined contribution scheme.
Other challenges include:
1. The financial services industry is hell bent on convincing everyone they need to have enough to both fund their retirement AND leave a capital lump sum to their heirs. Very few can afford that luxury.
2. There is insufficient innovation in annuity products in this space – why can’t I buy via monthly or annual contribution from age 50 to 65 a deferred annuity that will deliver me an income from age 80 to death? Then I focus my retirement savings on a manageable job of covering me from age 65-80. This is possible in the US.
3. Retirement ages are falling in South Africa as firms seek to bring in younger workers to aid in transformation – both digital and employment equity related. In the private sector few are going to be lucky enough to work to age 65.

In years gone by most companies offered a group pension fund. The number of companies still doing this is reducing.

Most probably they don’t want to have to listen to employees complain about poor performance and regulation 28.

Good article.

“Those who won’t learn from history are doomed to repeat it”

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” A. Einstein

Einstein probably thought in relatively stable currency (USD?); not a depreciating ZAR where you get taxed on your compounded interest. A little more tricky.

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

NEWSLETTERS WEB APP SHOP PORTFOLIO TOOL TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: