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The rules on Exchange Traded Funds (ETFs) have changed, widening access to foreign investments. In the mid-term Budget Finance Minister Tito Mboweni dropped a silent but violent bombshell. The 30% cap on the foreign component of retirement funding has effectively been lifted. If they wish, South Africans can now effectively invest 100% of their savings in foreign assets. In the light of continued poor returns from SA investment markets, the change removes one of the key drivers of financial emigration by those with the means to do so. In this podcast, financial heavyweights Magda Wierzycka of Sygnia and Magnus Heystek of Brenthurst Wealth Management explain the implications – and why they regard this as a major breakthrough for savers. – Editor
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* Sygnia statement on ETF rules
Exchange traded funds referencing foreign assets are now classified as domestic
The South African Reserve Bank (SARB) released Exchange Control Circular Number 15/2020 on 29 October 2020, which stipulates that all foreign-classified debt and derivative instruments, as well as exchange traded funds (ETFs), referencing foreign assets that are inward listed on a South African Exchange and trade and settle in rands will henceforth be classified as domestic (not foreign) instruments.
The circular advises that the following entities may now invest in inward-listed instruments without restriction: South African institutional investors (which include retirement funds, retirement annuity (RA) funds and preservation funds); authorised dealers; South African companies, trusts, partnerships and private individuals; emigrants, subject to defined emigration policy; and bona fide non-residents.
Both the SARB and the JSE have confirmed our interpretation of the circular to mean that institutional investors can treat inward listed ETFs referencing foreign assets – such as the Sygnia Itrix S&P 500 index-tracking ETF – as “domestic assets”.
To further satisfy our understanding of the SARB circular, we obtained an independent legal opinion from a top-tier law firm on the application of the SARB circular to retirement funds in light of Regulation 28, which opinion advised that:
- Any retirement fund (including RA and preservation funds) can invest in ETFs referencing foreign assets without such investment falling within the 30% offshore limit determined by the SARB in accordance with Regulation 28 or such other amount as may be prescribed; and
- Regulation 28 will only apply to such investments in the context of individual issuer and asset category limits.
This has profound implications for all retirement funds, as there is now effectively no limit on the offshore exposure an investor can hold within their RA or preservation fund, provided that such exposure is obtained via inward-listed ETFs which are now treated as domestic assets.
To ensure all protocols are followed, we also approached the FSCA for comment on the circular, who advised that they are engaging the SARB and may issue a statement. It is instructive that the FSCA has not before prescribed more restrictive foreign asset limitations than those set by the SARB and we believe it unlikely, though not impossible, that they will do so this time. Sygnia Itrix ETFs have the longest performance track record (16 years) of any international ETFs listed on the JSE, with R23.5bn in assets under management.
- Magda Wierzycka on humble beginnings, inspiring career, venture capital plans #BestofBizNews
- Sygnia founder Magda Wierzycka lifts lid on how her company bought into Oxford’s Covid-19 vaccine
- Magnus Heystek on why it’s essential to build wealth offshore. Who are the real skelms? #BestofBizNews
* The dramatic changes opening up the world for your retirement funds (see above) are in focus in Jackie Cameron’s Finance Friday. Join her at noon on Friday with expert guests including Magnus Heystek. Register here: https://register.gotowebinar.
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