National Treasury announced an increase in the limits for offshore investments by collective investment schemes, investment managers and long-term insurers from 35% to 40%, and an increase from 5% to 10% for investment into Africa. It is this allowance that CIS Managers use in their funds that have offshore exposure, including rand-denominated feeder funds, and explains why Managers are required to close their feeder funds to new investments when the allowance has been exceeded.
Importantly, this change to the offshore investment allowance also has the effect of immediately changing Regulation 28 of the Pension Funds Act, which sets the asset allocation limits for individual retirement funds. As a result, the maximum offshore exposure for a Regulation 28 fund will increase to 30% and 10% to Africa.
This is to be welcomed as research has shown that for many investors, the optimal allocation to offshore assets is more than the somewhat arbitrary 25% previously allowed in terms of Regulation 28. BNP Paribas illustrated that for real return mandates from inflation plus 4% a strategic allocation of at least 28% to foreign assets, rising to 50% as the required return above inflation rises, is optimal.
Figure 1: Regulation 28 limits add to risk, reduce return
Source: BNP Paribas 4Q 2015.
While the optimal strategic allocation to foreign assets will depend on each investor’s personal circumstances, risk profile and longer-term financial planning objectives, the evidence suggests that, for many, it is at least a third of their assets.
Interestingly though, many institutional investors have not reached the current limit of 25%. This is evidenced by considering that the offshore exposure of the average multi-asset high equity fund is substantially underweight this limit at approximately 15%1 (and exposure to Africa is negligible). Therefore, while this additional flexibility is to be welcomed, it appears that many institutional investors still favour South African-domiciled assets – which may themselves derive differing degrees of offshore revenue.
The Investec Opportunity Fund is different
The Investec Opportunity Fund, by contrast, is at maximum offshore exposure, as high quality global equities remains portfolio manager, Clyde Rossouw’s favoured investment. These shares represent a balance between old economy staples like Nestlé and Johnson & Johnson, and exciting higher growth opportunities like Visa and Priceline (the owner of Booking.com). What these businesses have in common, apart from their prodigious cash generation and exceptional returns on capital, is an ability to grow with a lower dependence on the economic cycle than the average business.
Clyde explains; “As investors are exposed to a narrow and concentrated opportunity set in South Africa, we believe that adding a quality offshore component to a SA portfolio provides complimentary exposures. This forms an integral part of diversification. Aside from the complementary exposure benefit, we are finding superior quality businesses offshore that have proven their ability to deliver high-quality profits, sustainable growth in earnings and cash flows, and high returns on invested capital (ROIC).”
The Investec Equity Fund is also different!
While not strictly a fair comparison as a number of equity unit trusts funds have domestic-only mandates, it is interesting to note that the Investec Equity Fund currently has 19% invested in offshore assets. This is because, even though South African exposed equities (banks and retailers) are currently offering a great investment opportunity (thanks to our positive political developments and foreign investors looking favourably at South Africa again), we focus on building a well-diversified equity portfolio with a combination of the best opportunities available to us.
Co-portfolio manager of the Investec Equity Fund, Hannes van den Berg explains: “The South African FTSE/JSE All Share Index is a small and narrow Emerging Market index relative to global Developed Market indices. Having exposure to global equities gives the fund access to unique opportunities not available in our local market, which complements the investments already in the fund.
The next time there is a real global growth scare, where all Emerging Market currencies come under pressure, we are going to want to have money offshore that will benefit from the rand weakness that will then follow.”
While welcoming the increased offshore allowance Hannes noted that; “There is a lot of momentum currently behind South Africa, and that inflows from foreign investors can continue to support a stronger rand for some time. As a result, we will not be increasing our offshore exposure in the Investec Equity Fund as yet.”
How can investors access offshore investments?
Given that almost 50% of all investments into unit trusts are in multi-asset funds, this suggests that investors need to look elsewhere to ‘top-up’ their offshore investments.
Essentially investors can chose between:
- Rand-denominated feeder funds, such as the Investec Global Multi-Asset Income Feeder Fund, Investec Global Strategic Managed Feeder Fund and Investec Global Franchise Feeder Fund, which invest directly into their respective underlying funds. By doing so, investors do not make use of their individual offshore allowance. Rather, they invest in rands and when they disinvest, the proceeds are paid in rands. So while investors benefit from being invested in funds that only hold offshore assets, they remain exposed to South African political risk
- Foreign-domiciled global funds, such as the Investec Global Multi-Asset Income Fund, Investec Global Strategic Managed Fund and Investec Global Franchise Fund. By doing so, investors invest directly into a FSB-approved offshore fund in its dealing currency e.g. dollars, pounds or euros. When disinvesting, investors will then also receive the proceeds in the fund’s dealing currency.
As one of the first asset managers to have built a global firm from emerging market origins, the journey of our business has uniquely prepared us to navigate a rapidly evolving world. Our global approach, combined with a footprint in emerging and developed markets, enables us to find the best investment opportunities for our clients.
Investec’s rand-denominated feeder funds can be accessed directly from Investec and via Investec Investment Management Services (IMS), or through most of the linked investment service provider (LISP) companies in South Africa. Similarly, our foreign-domiciled funds can be accessed directly, via the IMS GlobalSelect platform or through other LISP companies’ offshore fund platforms in South Africa.
1Source: Morningstar Asset Allocation report, 31.01.18.
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