Posted on December 15th, 2010 in Industry News
National Treasury has announced that institutional investors can now invest an additional 5% of their assets off shore. For pension funds, this means that 25% of assets can be invested abroad, and while it is not entirely clear, we expect that the additional 5% permitted investment into Africa will also be retained.
This move is part of a response to increasing inflows into the country and the resulting strong rand.
For pension funds, the result is that up to 30% of the fund’s investment portfolio may now be invested offshore. We welcome this additional flexibility, but there are several considerations for trustees in light of this development.
Asset-liability matching
The liability of the fund is the promise of paying pensions, and the trustees need to consider to what extent international assets are a good match for this liability. In most cases, members are likely to retire locally, and therefore international assets are not a close match for the liability. Some level of diversification can be justified as a risk control measure, but now that the potential overseas investment is 25%-30% of the portfolio, trustees need to consider if utilising the full exposure remains appropriate to match the liabilities of their Fund.
Asset manager uptake
We expect that given the strength of the rand, asset managers will be eager to utilise the additional 5% as most perceive international equities to be offer better value than domestic equities at present. Therefore, it is likely that any balanced fund will want to move quickly in the direction of the full 25% now allowed, however the restrictions of Regulation 28 will delay this.
The additional 5% in Africa is not generally extensively utilised by managers – most managers have less than 2% invested in Africa – if any. This is a combination of lack of expertise, lack of availability of suitable investments and Trustee resistance. We don’t expect this to change. So on the whole, we expect most balanced funds to target international exposure of up to 26%-27% in the medium term.
Regulatory limitations
Regulation 28 still lags behind exchange regulations, and allows only 15% offshore, which can be extended to 20% on application. Regulation 28 is currently being revised and the proposals remedy this discrepancy, but for now, the new 25% limit is in conflict with Regulation 28. It remains to be seen how this will be addressed; however, we expect that funds will again have to apply to the FSB for permission to utilise the full 25% allowance. We will keep clients informed in this regard.
In conclusion, it is likely that balanced funds will move towards increasing their overseas investments to the new limit of 25%; trustees should review their investment strategy to decide whether this amount of non-rand exposure is a good match for the fund’s liabilities. Fund managers are likely to contact trustees soon to request that funds apply for permission to use the full 25% allowance; if trustees are not prepared to do so, they may need to contemplate an adjustment to their overall strategy to compensate.
Please contact us if you require further information about this subject.
Update: 05/01/2011
Subsequent to our article of 15 December, the FSB issued Circular 6 of 2010. The circular states that until the amendments to Regulation 28 have been effected, funds would have to apply for exemption in order to utilize the increased limit. However, it should be noted that funds who have previously received exemption do not need to re-apply.
The FSB will shortly be sending letters to those funds exempted. Most funds would already have applied for an exemption when limits were increased from 15% to 20%, and therefore do not need to apply for further exemption to go to the 25% level. If you are unsure about your exemption status, please contact us and we will be happy to assist.
