Stretch­ing the lim­its

CHIEF TECH OF­FI­CER JEAN-JAC­QUES VAN OOSTEN HAS RE­SIGNED AF­TER ONLY FOUR MONTHS ON THE JOB

Financial Mail - - INVESTOR’S NOTEBOOK - @scranston

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.

Cap­tive source

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.

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