Stretching the limits
CHIEF TECH OFFICER JEAN-JACQUES VAN OOSTEN HAS RESIGNED AFTER ONLY FOUR MONTHS ON THE JOB
There is no doubt that the increases in foreign exchange limits in the most rescent budget were largely ignored. Yet it is highly significant that a total of 40% of money invested in unit trusts, pensions and life policies can leave the country — 30% globally and 10% to the rest of Africa. Perhaps it is not as tangible as the personal allowance which now allows R1m/year as a travel allowance without the need for SA revenue service clearance, plus a further R10m/year with clearance. And it all started with a R200,000 “lifetime” allowance in 1997.
But for most people with smaller sums to invest, the hassle of buying foreign exchange and going through tax clearance is hardly worth it.
Realistically, most will access foreign markets through rand-denominated unit trusts and life policies. Individuals with retirement annuities can simply ask the product provider to rebalance their portfolio, putting an extra 5% weighting to a global rand-denominated fund. It’s much easier than sending money to Jersey or Luxembourg, but then you might not need to adjust, as any balanced fund in which you are invested is likely to increase their offshore weighting over the next few months.
The R140bn-strong Allan Gray Balanced is already taking advantage of the change. And with a more generous allowance, anyone in an Allan Gray living annuity or endowment can invest up to 60% of their portfolio value in offshore assets. I wouldn’t usually give this kind of free publicity but Allan Gray is now the largest linked product company in SA. Earl van Zyl, who works in Allan Gray’s product and technology engine room, says there is a selection of international shares, what we commonly call rand hedges, listed on the JSE, some with quite limited exposure to SA itself such as British American Tobacco and Richemont.
But the Steinhoff debacle has shown that this set of shares is by no means safer than comparable shares on the London or New York exchanges.
In fact, Van Zyl says there is a good argument that pension funds in SA should be allowed to invest even more into international markets, given the narrow, concentrated nature of the JSE.
I suspect that is naive, as any SA government would consider pension funds an important captive source of domestic capital. If anything, there will be regulations coming to force funds into more domestic social and physical infrastructure projects. But Van Zyl says it can be a win-win: domestic outflows have been more than offset by international investments. In turn, the cost of capital on local markets has declined, the discipline of markets has helped deal with governance and SA pension funds have enjoyed returns well above inflation, though not over the past three years.
Van Zyl tries to answer the question of how much offshore exposure one should have. He suggests that depending on household spending habits it should be between 30% and 50%. I suspect it could increase once returns from foreign cash and bonds get more attractive, so it will be possible to own a simple low-risk currency hedge investment which at least, unlike today, provides some income. I also believe asset classes will become more important than the local/global divide. Already, for example, Investec looks at equities holistically and isn’t too worried if they are bought in London or Cape Town.
Allan Gray still splits the asset, with global equities run by Bermuda-based Orbis, yet Coronation does all its international stock selection from SA. Somehow both are doing well.