Use offshore limits with care
Retirement savers will soon be able to diversify further into offshore markets, but whether to do so is no longer clear cut.
Finance Minister Malusi Gigaba said in his budget speech this week that the offshore allocation and the Africa allocation for institutional investors such as retirement funds and unit trust funds would be increased by five percentage points.
A circular giving effect to this was published by the Reserve Bank on Wednesday. It means retirement funds governed by investment limits in terms of the Pension Funds Act can increase offshore allocations.
Roy Havemann, chief director for financial markets and stability at the Treasury, says the new limits offer greater diversification of investment in a wider range of asset classes as well as jurisdictions that may be yielding higher returns while balancing the need to protect you from overexposure to volatile global markets.
For retirement savers this means retirement funds will be able to invest 30% offshore instead of 25% and an additional 10% instead of 5% in Africa.
Unit trust companies, investment managers and life assurers will be able to send 40% of their assets offshore instead of 35% and 10% instead of 5% into African markets.
The limits on unit trust companies have resulted in popular South African unit trust funds from Allan Gray and Foord being closed to new investment. Allan Gray was recently forced to limit the offshore investments of living annuity and endowment policy investors using its investment platform.
Investment platforms are likely to respond as quickly to reflect the new limits. Investec, for example, confirmed changes would be made on Friday night.
However, if you havea retirement annuity which has maximum offshore exposure, you may want to consider whether or how to increase that allocation.
Gavin Ralston of global asset manager Schroders says the momentum in local financial markets looks strong while in the rest of the world bull markets are mature, so investments in local shares and bonds may do better.
Confidence will return and money from offshore will flow into equites
However, he says, there will come a time when the increased limit will be useful, giving a much wider and more diversified range of investment opportunities.
With the political change in the country, confidence will return and money from offshore will flow into South African equities and bonds, says Ralston. This makes Schroders's portfolio managers enthusiastic about South African investments. How long this lasts will depend on how long that positive sentiment lasts.
Ralston says Schroders is still modestly positive on developed-market equities but is worried about higher inflation in the US where growth is the strongest.
In the short term, Schroders sees prospects for South Africa being at least as good as for developed markets, he says.
PSG Asset Management says now is not the time to be bold about offshore investments.
At a recent presentation to advisers, PSG fund manager Shaun le Roux said the global equity market was in its ninth year of a bull market - "another year and it will be the longest bull market ever".
He said investors should be "dialling back risk" and that the US market, as measured by price to earnings ratios, had only been more expensive twice in the past century - just before the 1929 market crash and during the Dotcom bubble.
Le Roux said investors should invest counter-cyclically in uncrowded or unloved parts of the market where prices and market expectations were low because these offered the greatest potential to find shares or bonds that are undervalued.
Le Roux said the local equity market performed in line with other emerging markets but had missed out on the most recent upturn in emerging markets because of political events.
Foreigners had been net sellers of South African shares and bonds when all other emerging markets were going up and domestic fund managers had also been pessimistic about local shares that relied on the local economy - the so-called SA Inc shares - preferring the rand-hedge shares that benefited from offshore earnings.
Africa should benefit from synchronised global economic growth
Le Roux said if you were heavily exposed to local rand-hedge shares you should manage your expectations because there could be a few years when the rand is stronger.
PSG had tilted its local equity portfolios to the mid-cap SA Inc shares and was avoiding the large cap dual-listed rand-hedge shares that dominated the indices such as the All Share Index.
Lesiba Mothata, the executive chief economist at Alexander Forbes Investments, warns that a number of managers have switched to local SA Inc shares. While parts of the local equity market - banks, retailers and industrial companies that focused on the local economy were cheap in the middle of last year, the South African story has improved and "the market has bolted already".
The most recent downturn in offshore markets, however, presents an opportunity. Even now you may want to take advantage of the increased offshore allocations and invest offshore to benefit from enhanced diversification, Mothata says.
Havemann says fund managers and retirement funds prefer local investments and overall managers have not used their full offshore capacity. The increased limits, will, however, benefit individual managers who have hit their offshore ceilings.
In aggregate collective investment schemes had used less than 22% of their 35% allowance and retirement funds had used 16.7% of their 25% according to allocation figures at the end of September last year, Havemann said.
When it comes to their African market exposure, all institutional investors had less than 1% of their funds in African markets at the end of September.
Mothata says investment in private equity in African countries presents a big opportunity for retirement funds.
Investment in African markets is low because there are few listed shares and liquidity is low making it difficult for fund managers to buy and sell these shares.
Africa should benefit from synchronised global economic growth, Mothata says. Private equity investments in infrastructure and agriculture at the right fees present a long-term opportunity suitable for long-term retirement savings, he says.