Increase in offshore allocations

CLARITY : INSTITUTIONAL INVESTORS CAN NOW INVEST UP TO 30%

The intention behind Regulation 28 is to ensure that retirement savings are invested responsibly.

Akey announcement by Finance Minister Malusi Gigaba last week included the 5% increase in offshore allocations by institutional investors, meaning institutional investors can now invest up to 30% offshore. However, institutional investors typically include retirement funds.

Discovery Invest approached the Financial Services Board (FSB) for clarity on how this would work practically in light of the Regulation 28 restrictions under the Pension Funds Act, which currently stipulate that retirement funds may not invest over 25% offshore.

The FSB’s Olano Makhubela says: “So, once SA Reserve Bank (Sarb), prescribes the additional 5% investment allowance… a retirement fund may increase its exposure up to the increased amount.”

Investors can also achieve increased offshore exposure via endowment policies, if the insurer or financial services provider decides to invest a further portion of the assets backing the policy offshore. Note that the 30% foreign exposure limit applies at an institutional level, and only on the institutions’ total retail assets, to avoid double counting.

The intention behind Regulation 28 is to ensure retirement savings are invested responsibly. This means the investments are spread across the asset classes of equity, cash, bonds and property. As it stands currently, the limits of Regulation 28 are:

Foreign investments: There’s a 25% overall limit, with offshore investments also being included in the calculations for each asset class.

Cash: 100% of retirement fund assets may be held in cash instruments but with sub-limits of 25% on deposits with any one local bank and five percent with foreign banks.

Debt: 100% of assets may be held in any South African government-issued or guaranteed debt instruments (bonds) and 75% for all other debt instruments. Instruments guaranteed by foreign governments are limited to 10% of a fund’s assets for each issuer but with the 25% limit on all foreign investments.

Equities: The limit on equities is 75%, and there is a limit on individual companies based on their market capitalisation. For example, a fund may invest up to 15% of its assets in a company with a market capitalisation of R20 billion or more, but only 5% if the market capitalisation of the company is less than R2 billion.

Immovable property: A retirement fund may invest up to 25% in property, including listed real estate companies, with sub-limits on investments in individual entities depending on the size of the entity. Property equity investments are not included in the 75% equity limit.

Commodities: A retirement fund may invest up to 10% of its assets in commodities. The full 10% may be in gold, but there is a limit of 5% in other commodities.

Alternative investments: The overall limit is 15%, but hedge funds and private equity funds are each limited to 10%, and there are further sub-limits on single entities.