California-based Ginsglobal Index Funds MD Anthony Ginsberg says regulation 28 is doing tremendous damage to all South African pension funds and its contributors. He says they’re arbitrarily restricting offshore access to a certain percentage, which in the current climate is detrimental, following the backlash to President Jacob Zuma’s Nenegate blunder. And if one looks beyond this, considering the JSE only makes up 1% of the world’s stock market capitlisation, it’s heavily restrictive, remaining heavily exposed to local political sentiment. He says it’s time the industry agreed to a new set of standards to allow for the diversification and until such a day, retirement savers will be excluded from much of the developed world’s stock market growth. – Stuart Lowman
By Anthony Ginsberg*
Given the billions of Rands wiped off the value of the Johannesburg Stock Exchange the past month, South Africans need to seriously consider how best to protect their finances and retirement savings.
There are clear solutions that every South African can follow to maximize their retirement safety net. SA faces a bumpy road ahead, with the IMF predicting 2016 GDP growth at just 1.3%. With the commodity super-cycle effectively dead and buried and SA’s massive structural unemployment now compounded by widespread mining layoffs, SA needs to retool its economy fast.
With drought conditions and an ever weakening Rand both pointing to looming inflation in 2016 – it is imperative that all SA savers retool their portfolios to protect their financial wellbeing.
The JSE today represents approximately 1% of the world’s stock market capitalization. Although the main JSE ALSI 40 Index is increasingly represented by SA companies with offshore interests, it remains heavily exposed to the vagaries of local political sentiment. Consequently it is high time South Africans dramatically increase their offshore exposure, by buying into a broad portfolio of leading global companies, not accessible locally. Given the events of last week, few can argue that is not prudent from a risk diversification strategy for the average South African investor to have a sizable component of their assets invested in respected offshore markets. Even in stable countries such as the US, United Kingdom and Chile, the vast majority of leading pension funds increasingly use global equity benchmarks to measure their performance. Consequently an ever increasing part of their assets are allocated to the best foreign investments available.
Unfortunately ordinary South Africans are hamstrung and penalized by outmoded pension regulations.
This has effectively limited how much all SA pension funds are able to invest abroad. In particular Regulation 28 of the Pension Fund Act sets limits on how money invested in an official retirement vehicle can be allocated – a maximum of just 25% can be invested abroad. South African asset management firms are also constrained by a similar 25% limit. These arbitrary limits are relics of another era.
This form of exchange control is increasingly impoverishing every South African who contributes to a local pension fund or retirement account. These regulations have prevented prudent South African savers from enjoying superior returns from global markets. By limiting how much savers can invest abroad, local investors have lost out on massive gains available offshore. While the US stock market has nearly tripled in US$ terms since 2009, local returns by comparison have been pedestrian. Translating these US returns back into Rands would have given SA savers a hugely superior return (roughly three times greater) as compared with local JSE Index returns.
By limiting the amount of monies that can be invested abroad by SA’s largest pension funds and asset managers (including unit trusts) – this ensures an artificial hot-house effect for local markets. While this may help prop up local bond, equity and even currency markets in the short-term – ultimately, as seen by the events over the last week, SA investors are playing a dangerous game. When global sentiment turns against SA, local pension funds bear the brunt of the fallout (R170bn of stock market losses the past week). The JSE by most international stock market standards remains significantly overpriced, as measured by Price/Earnings (PE) and Price/Book ratios. In fact SA’s PE ratio currently rivals both the UK and US by some measures (approaching 20) – vastly higher than most other emerging markets.
Read also:Â Are JSE shares expensive? Our graphic shows current 20 PE dangerously high
This form of exchange control helps ensure the misallocation of resources by SA investors – often investing in overpriced assets. It is reminiscent of the days of Apartheid, when Anglo American and other local conglomerates acquired interests in a wide range of unrelated local businesses, many of which they knew little about or had no capacity to manage.
Foreign investors now control more than 60% of all investments on the JSE and own about one third of our bonds. These bond holdings are currently under threat with SA teetering just one notch above junk status by the rating agencies. SA bonds are currently still included in various global bond indices, forcing large foreign institutions to purchase them. The bond market volatility experienced last week (losses of 12% estimated) will look like child’s play were SA to lose its investment grade status in 2016.
The most prudent approach then is for South Africans to diversify as much of their holdings abroad as possible. Sadly until such time as Regulation 28 is modified or repealed, SA retirement savers will be excluded from much of the developed world’s stock market growth. It is high time the SA asset management industry and government agree on a new set of standards to better reflect the risk diversification and asset allocation needs of the average South African in the 21st century. The days of believing a 25% offshore exposure is all South Africans require are long gone and is in fact punitive. It is single handedly penalizing all retirement savers and limiting the size of their retirement pot. Hiding behind the current set of Regulation 28 standards does a disservice to all South Africans – helping to impoverish all retirement savers.
The immediate solution for investors (outside of their pension) is to access unit trusts/ETFs that offer more than 25% offshore exposure. There are both local rand denominated and foreign priced unit trusts available to local investors and approved by the FSB – providing significant offshore exposure.
A key lesson from last week, is that investing locally is not only risky, but the opportunity costs of not being fully exposed to fast growing offshore markets continues to impoverish local investors. Local investing is not so lekker after all. It is time for Regulation 28 to be dramatically reformed or scrapped altogether.
- Anthony Ginsberg, Managing Director, GinsGlobal Index Funds
