Retirement savings investments: local focus with offshore flavour
Retirement funds must invest locally but it's not all tied to SA economy
SA faces tough economic times ahead, but fund managers are relatively sanguine about investing your retirement savings in local markets.
For many people, retirement savings are their biggest investment. Managers of these funds are obliged in terms of regulation 28 of the Pension Funds Act to invest at least 60% in local markets.
During a virtual Meet the Managers conference hosted by investment event and advisory firm The Collaborative Exchange this week, many fund managers predicted the South African economy would take longer than others around the world to recover from the pandemic and expressed concerns about the spiralling government debt.
They said local shares were cheap, but the value would not be unlocked until the government fixed the structural problems that made the country uncompetitive and prevented companies from delivering earnings and profits.
Many of the managers said they had close to the 30% offshore limit allowed for multi-asset funds suitable for retirement savers, and some were using the additional 10% they are allowed to invest in Africa, to invest in the continent's fixed income markets.
The portion they are obliged to invest locally is mostly in equities, but they focus on companies with dual listings and those with overseas revenue streams to provide a rand hedge.
Iain Power, chief investment officer of Truffle Asset Management, said companies that make their money from the domestic market - the so-called SA Inc shares - accounted for 70% of local shares in 2004, but a massive contraction had resulted in big global companies taking centre stage.
Power said Truffle had over the past four years invested in global players rather than SA Inc companies, and made good returns. Truffle still has almost 65% of its equity portfolio in dual-listed shares and rand hedges.
Power said that until the government took decisive action to put the economy on a sustainable path, Truffle would invest only in select banks and industrials - companies such as AECI and Netcare, with competitive advantages and strong management teams able to operate in a difficult environment.
Laurium portfolio manager Brian Thomas said while there was a lot of pessimism about SA, only 21% of an investment in the all share index and 34% of an investment in the capped shareholder weighted index was actually exposed to the heartbeat of the local economy.
Beyond the dual-listed and rand-hedge shares, some domestic companies also operated beyond SA's borders. For example, 14% of Foschini's turnover came from London and 15% from a very successful business in Australia, Thomas said.
In a balanced fund that invested across asset classes, exposure to securities dependent on the fortunes of SA could be as low as 13%, he said.
Dual-listed and rand-hedge shares other than Naspers had not done particularly well for local investors over the past seven years, Thomas said. This is the period over which many high equity multi-asset funds have failed to reach their inflation plus 5% targets. However, investors with exposure to these shares should benefit in future as the rest of the world recovered more quickly from the pandemic than SA.
If you had invested in rand-hedge and dual-listed shares at the bottom of the market on March 23, you would have enjoyed a 55.5% return to mid-August - better than you would have received from the S&P500 in rands, Thomas said.
Fund fact sheets show that of the 44% of Allan Gray's Balanced Fund that is invested in the local equity market, bigger holdings are in larger companies with offshore earnings - for example Naspers, British American Tobacco and Glencore.
Allan Gray portfolio manager Rory Kutisker-Jacobson said buying Naspers provided discounted access to the Chinese tech stock Tencent and other Naspers businesses.
Allan Gray was seeing better value in SA Inc companies, Kutisker-Jacobson said, but shared concerns about the country's precarious economic position and poor government choices.
Allan Gray's Balanced Fund had close to the maximum - 29% - in offshore markets but was avoiding "overvalued" tech stocks that have driven the broad US stock market index to record highs.
Kutisker-Jacobson said five companies - Microsoft, Apple, Amazon, Google and Facebook - made up more than 20% of the S&P500, and even if they were high-quality businesses, the expectations about future growth that are built into their share prices could be unrealistic.
He said Facebook and Google, for example, were heavily reliant on advertising revenue and already earned one-third of what is spent worldwide on advertising. These businesses were growing at 15% but advertising revenue traditionally grew at just 3% a year.
Power said Truffle was also concerned about US equity valuations and was positioned defensively in global markets. Locally it is avoiding listed property and is in shorter-term bonds because of its concerns about SA moving into a debt spiral.
Laurium portfolio manager Jean-Pierre du Plessis said SA's bond yield curve was the steepest it had ever been because interest rates had reduced yields for shorter-term instruments, while long-term yields were high - at 9% for a 10-year bond and 10%-11% for bonds of longer durations.
Du Plessis said the high risk premium being paid on longer-term South African government bonds presented opportunities for investors.
Coronation's head of retail distribution, Peter Kempen, said Coronation believed a local currency debt default was unlikely. About 90% of SA's debt was in rands, which made it less prone to currency movements and made default less likely.
Kempen said saving in cash assets was unlikely to keep pace with inflation, leaving no choice but to invest in shares.
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