WILLEM LE ROUX: Offshore exodus — existential crisis or just another opportunity?

The increase in offshore allowance for retirement savings under Regulation 28 (from 30% to 45% in 2022) has accelerated outflows from the local asset pool. Most of this capital has gone into global equities — especially developed markets — as investors diversify away from concentrated domestic risks.

The accompanying graph shows the average and median offshore holdings per Regulation 28-compliant funds from 2014 to 2024. While the expanded investment universe brings opportunity, it also increases complexity. One notable challenge is US market concentration.

The US now makes up nearly three-quarters of the MSCI World index and about 65% of the MSCI All Country World index. The “Magnificent Seven” alone account for almost a quarter of the MSCI World index and are trading at elevated earnings multiples. With earnings now normalising, the risk of a correction is rising — and indeed, we’ve seen some corrective moves.

In the short term there are factors which may further benefit US companies, but in the medium term, some headwinds are likely. Another challenge is the selection of strategies for offshore assets. It’s been a tough environment for active equity managers globally. The extreme concentration — especially the dominance of the “Magnificent Seven” — has made it difficult for active strategies to outperform benchmarks. Over a 10-year horizon, developed markets have seen only about 10% (at best 20%) of active managers outperform general equity indices (as a proxy for passive alternatives), as S&P Indices Versus Active (Spiva) data confirms.

SA active managers competing on this global stage by managing non-South African assets face additional challenges, including limited scale and resources — they have generally been even less successful than offshore counterparts. These same SA active managers have fared better in managing local assets (with about 32% beating the index), largely due to a less crowded market and a high proportion of cyclical counters such as mines and resources. Nonetheless when it comes to managing offshore assets, promising strategies such as portable alpha — offering offshore exposure with more predictable outperformance — are proving useful.

Another consideration in determining an appropriate split in assets between local and offshore is that markets move in cycles. Offshore investments — especially in the US — have delivered strong returns over the past 10-15 years, but the decade before favoured SA assets. No market leads forever. A diversified approach, tailored to investor risk profiles and time horizons, remains key.

A valuable skill in this context is the ability to identify asset managers’ true areas of skill versus areas of doubtful skill. Removing tools from the asset managers’ toolbox which tend to destroy value can add as much to an investment outcome as providing tools which managers are good at using. For instance, we have invested heavily in identifying which multi-asset managers demonstrate consistent skill in three separate areas:

1. Local asset allocation and stock selection.

2. Offshore asset allocation and stock selection.

3. Regional allocation (that is between SA and offshore assets).

This evidence shapes our solutions in a number of ways, for example managers who do not have clear skill in numbers 2 or 3 are given local mandates, which we complement with specialist offshore exposure.

Local asset pool

If SA retirement investors over-allocate to global assets, this could weaken local capital markets, reduce JSE liquidity and limit growth. Yet most retirees will draw an income in rand. Offshore diversification has value, but local opportunities remain compelling.

Though this may look like an existential crisis for SA investment markets, there is still substantial depth and from a short- to medium-term horizon perspective, recent market volatility and investors’ preference for offshore assets implies a good entry point and opportunity to invest in local assets. No returns come without risk and that applies to SA assets, but valuations are cheap and offer good upside.

This capital outflow trend is also reversible. Should policy become more supportive of business and investment, capital could return. SA companies collectively hold significant capital — R1.4-trillion, according to economists — which could be deployed locally if confidence improves.

Beyond the traditional asset classes that are attractively priced, SA offers a number of other attractive investment opportunities.

Infrastructure

Infrastructure is an attractive asset class globally at the moment — both from a valuations perspective and a general need for more infrastructure investment around the world. SA infrastructure investments must compete with offshore opportunities for funding. If the projects are bankable and attractive, the payment stream can be compelling for local pension funds — particularly those paying annuities. If not, forcing retirement funds to invest is effectively a tax on investment returns.

Public-private partnerships — or full outsourcing to the private sector — can work well. Consider solar power, which all but ended load-shedding (despite some instability), largely thanks to private sector participation (not to discount the improvement accomplished within Eskom). When done properly, infrastructure gets built, industry profits, investors earn returns — everyone wins. This is far better than forcing captive capital to provide cheap funding, which ultimately weakens retirement outcomes.

Retirement savers

SA’s alternative assets market is also growing considerably, including hedge funds and private markets. Private equity in SA has had mixed results, but a more stable political outlook under the government of national unity could support better execution and outcomes.

Private credit and mezzanine debt are valuable as part of a multi-strategy alternatives allocation and hence it has not been surprising to see the broader market showing growing interest in these asset classes. But alternatives require specialist skill. Selecting and managing these assets is more complex than for traditional asset classes, which is why we’ve built a dedicated team to evaluate and integrate the management of alternatives into our broader strategies.

This isn’t only about chasing outperformance — it’s about building resilience in portfolios by adding non-correlated return sources, which support consistent long-term outcomes — and offer a high likelihood of outperformance when built well.

The two-pot system

The two-pot system has drawn attention for enabling limited withdrawals from retirement savings. However, it introduces a long-term benefit: preserving two-thirds of contributions. Over time, the preserved pot will grow relative to the savings pot, reducing leakage and improving outcomes.

Importantly, individuals no longer need to resign to access savings — a move that could encourage job stability. While some may withdraw to fund offshore exposure it’s more likely to go towards debt or essentials.

Encouraging members to leave all retirement savings untouched — including the savings pot — is vital. Staying invested avoids early withdrawal tax, preserves access to low-cost investment options and enables compounding — one of the most powerful drivers of long-term financial wellbeing.

Despite muted growth and fiscal strain, we’re cautiously optimistic about SA’s economic and retirement outlook. The two-pot system enhances preservation. Local assets may outperform global peers again — it’s cyclical. This could encourage capital back into the domestic market.

Infrastructure remains promising — provided it’s investable. Alternatives offer diversification and resilience — when backed by skill. Offshore exposure is essential, but must be managed carefully, especially given concentration risks, and aligned to manager strengths.

SA still faces challenges — in education, employment, and public finances. But as the saying goes, the best time to plant a tree was 20 years ago; the second best time is now. The same applies to our financial future. Let’s take the opportunity to lay the groundwork for long-term prosperity.

•Le Roux is portfolio manager at Sanlam Investments Multi-Manager.