Enoch’s offshore mea culpa
Raising the ceiling on overseas investments ‘a grave mistake’ but undoing it isn’t easy, finance minister says
● Finance minister Enoch Godongwana has admitted the National Treasury made a mistake when it allowed pension funds and other asset managers to increase their offshore holdings.
The amendment of regulation 28 of the Pension Funds Act — introduced in 2022 to “externalise savings” of South Africa’s collective investment schemes industry in other markets — drew sharp criticism from a portfolio manager at the RMB/Sunday Times post-budget breakfast event in Cape Town on Thursday.
Speaking at the event, also attended by Treasury director-general Duncan Pieterse, Ntobeko Stampu of All Weather Capital asked if the government had any plans to reverse the regulation, which allows up to half of the assets held by retirement funds, longterm insurers and others to be invested offshore.
“We have shot ourselves in the foot by doing that. We need more savings invested in the country to fund its infrastructure projects, to get our economy to grow at a faster pace so we can create real jobs. But we’ve taken our money we’ve given it to foreigners where there’s actually no reciprocal benefit to us,” said Stampu.
“That money is managed by offshore companies, being invested in their own country for their own infrastructure. Are there any thoughts from Treasury to reverse this policy? It’s hurting the asset management industry, it’s shrinking the JSE,” Stampu said.
Godongwana accepted that extending the threshold had been a mistake, but said reversing the decision would be difficult.
“I think we agreed that it was a grave mistake. But the question is, ‘is it easy to undo?’ The answer is ‘no’, as there are people we are working with. We are debating in Treasury. There is a lot of disagreement on it. I’m guilty because my signature is attached to it.”
Godongwana said there were major disagreements at the Treasury over the decision.
“I don’t think now there’s a firm view to reverse the rules, except, I’m saying this with caution, if my DM [deputy minister David Masondo] was here, he would probably jump for my throat.
“He’s also chair of the Public Investment Corp [PIC], so he belongs to ... Can you see the factions in Treasury? He asked the question to me: ‘If I allowed PIC to take 45% out of this economy, what would happen to the JSE?’”
Retirement funds and other asset managers hold just over R4-trillion in assets, while the PIC — which also invests on behalf of the Government Employees Pension Fund — has about R2.5-trillion in assets under management.
Stampu told Business Times the policy has hurt asset managers, causing the industry to shrink as listed companies have to look elsewhere to find new sources of capital.
“The horse has bolted on the changes to regulation 28, giving rise to 45% foreign allocation,
and the unintended effects of this policy will be here with us for a long time to come. Our savings are now fuelling the growth and productive capacity of the recipient countries,” he said.
The lion’s share of those assets was allocated to offshore managers, who had no commitment to South Africa’s transformation goals, he added.
“The relaxation of regulation 28 is against the spirit of transformation, and it threatens to reverse the few gains the financial services industry has made in this regard. I gain no confidence that there is a political will to reverse this policy because of strong competing interests at play.”
Stampu said an allocator of capital who was agnostic on South Africa’s plight would welcome the regulation, but at the expense of the local economy’s developmental goals.
“The current estimation of the impact of the regulation 28 change on asset allocation is that the offshore allocation by pension funds has increased from 25% to between 35% and 40%. This suggests most of the externalisation of domestic savings is now a fait accompli,” Stampu said.
All Weather Capital’s strategy consultant
We are debating [the allocation] in Treasury. There is a lot of disagreement. I’m guilty because my signature is attached to it
Nick van Rensburg told Business Times that while it makes sense for funds to diversify, the jump in the offshore limit from 30% to 45% was too large.
“The effect of this has been to cause significant damage to the remaining 55% of South African assets under management, which experienced significant selling pressure,” he said.
“[It has also] reduced future demand for South African government bonds — at a time when we should be doing what we can to boost investment over consumption — and weakened the rand, which boosted inflation; more so for the poor as food and transport are a larger percentage of their spending basket,” he said.
Van Rensburg suggested lowering the offshore cap to 40% for three years followed by a review. If done in conjunction with the industry, it would create stability and certainty, he said.
“It would stop the outflows, and relieve some pressure on the rand. This will limit ongoing pressure on food and fuel prices. It will limit ongoing damage to the 55%-60% of assets under management that remain in South Africa,” he said.
Old Mutual Investment Group portfolio manager Jason Swartz said the increased allocation was a positive development. Offshore markets promising high returns will be appealing to funds and end-clients, which is not a problem as long as the risks that come with the diverse investment sources are clear from the beginning.
Other domestic asset classes such as bonds remained competitive, Swartz added.
“South African nominal bonds offer very compelling yields of more than 11% that compensate investors for our sovereign risks, compared to that of developed markets where yields are around 4%-5%.
“Whenever there is a wider opportunity set, if the risks are managed correctly, that should always benefit the client. I don’t really have a comment about reversing it, but finding the right long-term strategic balance between risk and return is critical to finding opportunities for real [inflationbeating] returns,” he said.
Infrastructure, renewable energy, port communications, data centres, and other basic services and infrastructure projects in South Africa were ripe for investment as these could have an exponential impact on the country’s growth prospects, Swartz said.
“We have seen the extent or the severity of the energy crisis moderate because private investment has stepped in. Given some of the challenges in logistics, that is likely to weigh on our potential growth, so Transnet is a huge policy headache, and adding private investment there would also have a huge uplifting effect on the economy,” he said.
Wade Witbooi, senior portfolio manager at Sanlam Investments Multi-Manager, doesn’t believe the increased offshore allocation would have a cooling effect on domestic investments, though it did mean local listed entities are facing more competition from global listed entities.
“Government needs to ensure that the economic and business conditions in the country are attractive and appealing so that companies can grow earnings in an economy that is also growing and providing opportunities for further growth and investment. If the overall pie grows, competition will increase and more companies will potentially list on our exchanges,” he said.
RMB chief economist Isaah Mhlanga said there were different ways to look at the 45% offshore allowance and the view of pension fund contributors was that their funds were seeing lower returns in the domestic economy compared with emerging peers and advanced economies.
“We have been seeing a decreasing number of listed companies, which is not unique to South Africa ... The market is highly concentrated. Investment opportunities in the listed market have shrunk, but for the pension fund member that is contributing for retirement, you need to maximise returns,” he said.
Thabo Khojane, MD of asset manager Ninety One, and deputy MD Sangeeth Sewnath, told Business Times higher offshore limits under regulation 28 will likely lead to a rise in retirement fund assets invested abroad, with the average offshore exposure of South African pension funds, excluding the PIC, increasing from 29% before the move.
“There is some variation in the offshore allocation of pension funds, however. According to the Alex Forbes Large Manager Watch, Coronation had the highest offshore exposure as of the end of December 2023, with 46%. The lowest exposure was Stanlib at 31% and Ninety One was at 41%.”
They said Ninety One supported the gradual relaxation of exchange controls; tightening them would instil a lack of confidence in long-term policy certainty.