SA retirement portfolios: 50% is invested abroad – what if Rand stops sliding?

Here's research to be interpreted one of two ways. South African retirement portfolios are only 50% exposed to the country. Great news for prospective pensioners if the Rand keeps sliding. But it won't look smart should the exchange rate move the other way. And as living expenses of SA pensioners is in Rand, what this suggests is tomorrow's pensioners are having quite a big bet with a savings pool that should actually be kept low risk. Old Mutual's Peter Brooke offers his insights. – AH

ALEC HOGG: Welcome back to Power Lunch. Proudly South African: have you ever asked yourself 'how South African are South Africa's pension fund investments'? Now's the time to do it. Peter Brooke is Head of Macro Solutions at Old Mutual Investments. He joins us from Cape Town. Peter, this is interesting because when we look at the JSE as a whole, something like 70 percent of the top 40 shares (the income they generate) comes from outside of South Africa. You've been having a look at the pension funds, or the retirement money that's put together for South Africans. How much of that is in fact, exposed to this economy?

PETER BROOKE: It's actually amazing. We started looking at it because we wanted to explain why the JSE was so different to the economy. When we looked at it, we saw that… Well, on our numbers, if you look at the entire JSE, roughly 60 percent is outside of South Africa. Then you start adding it into a pension fund and you have 25 percent of your investments outside anyway. You have the equity element in terms of those international assets. You have commodities. You have global bonds etcetera and actually, we came up with a number north of 50 percent. In other words, more than half of your pension fund is outside of the country or driven by global factors outside of South Africa.

ALEC HOGG: Some people might say that given the sogginess of the South African economy and some very uncertain legislation and policy decisions that have been made, that that's not such a bad thing. At least, when you're putting your money away into retirement funding, only half of it is exposed to this country.

PETER BROOKE: Look, I think in terms of the trend of South African corporates continuing to invest outside, that's going to continue. For instance, if you take the South African industrial shares, your typical companies such as Bidvest etcetera, roughly, 35 percent is outside of South Africa and I think that will accelerate. In financials, 20 percent is outside of South Africa and I think that will accelerate. Looking for growth, it's a good thing. Of course, the risk though, is we're very reliant on a weak Rand. If the Rand strengthens, suddenly our returns our not going to look so good.

ALEC HOGG: We had Sasol's results today and I guess that's one of the companies that you could also add into your calculations. It's going to become more foreign exposure into the future. They were explaining that currently, 57 percent of the CapEx is done in South Africa but that's only of CapEx of 40-billion. When you get to 100/150-billion, which is likely to happen in future then that percentage for South Africa will shrink. I guess, if you look ahead, maybe the number you have of half of our retirement money being exposed to South Africa, will become a lot less.

PETER BROOKE: I think that's absolutely true and Bidvest last week, announcing that they're going to look at growing their international food services business and listing it offshore, Sasol there – ethane cracker in the U.S.: all the companies are doing this and I think that trend will continue. It's also one of the reasons why I think it's so important to be able to look at your portfolio in a holistic manner. You have to look at where the exposure lies by country, by currency, and all the different drivers, and to have that international expertise too, because you're increasingly looking at Glencore versus Anglos but overseas, the impact of China into Naspers and Tencent… You have to be very aware of the global themes/trends that are driving your portfolio.

ALEC HOGG: Peter, we have a historic reason why South African investments are more focused on this country – exchange control and the isolation etcetera. Are we now heading to a more normalised global environment? I.e. if South Africa were a country of a similar size also be exposed in the way that your research has told you?

PETER BROOKE: I think we've largely normalised. For instance, if you look at the correlation of our market to global markets – and we looked at that from 1920 onwards – it's steadily grown, but is now running at over 80 percent. If you look at foreign ownership of our market, it's running at 40 percent. Foreign ownership of our Government bond market is just under 40 percent, so the integration that a small open economy like South Africa has… I think we're quite far on that journey. What it raises though, is 'what is the right amount of your assets to have outside of the country' because the truth is, all your liabilities are here, so you need to match those assets and liabilities, and I think that's going to be a real challenge for investors to think about.

ALEC HOGG: So if the Rand were to strengthen in fact, you could find yourself being a little bit short of retirement funds.

PETER BROOKE: Well, that's your risk and that's where you need to be quite clear about your objective. For instance, if you're retired and you're in an 'inflation plus two/three percent high-income' type of fund then actually, you only want to have ten to 15 percent of your assets outside of the country. Whereas, if you're quite young and investing for growth, you'd probably have more like 35 to 40 percent of your assets outside the country.

ALEC HOGG: Fascinating insights there from Peter Brooke. It just shows that it's not just a one-way bet. Peter is the Head of Macro Solutions at Old Mutual Investment.