A new horizon for offshore investing

A significant declaration from the South African Reserve Bank (SARB) has paved the way for retirement funds to increase their effective offshore exposure beyond the foreign asset limitation of Regulation 28 using locally listed exchange traded funds (ETFs). Following an announcement by the Minister of Finance in his 2020 Medium Term Budget Policy speech to make “cross-border business easier”, the SARB reclassified ETFs tracking foreign indices that are inward listed on a South African exchange, and that trade and settle in rands, as domestic instruments. The circular released by the SARB also advised that institutional investors, which includes retirement funds, may invest in inward listed instruments without restriction.

Regulation 28 to the Pension Funds Act aims to protect retirement fund members from poorly diversified investment portfolios by limiting exposure to various assets classes, such as equities and property, and to individual securities. It also stipulates that a fund may not hold more foreign assets than determined by the SARB - currently 30% of overall assets and a further 10% invested in Africa - or such other amount as may be prescribed.

Prior to the SARB announcement, investments in locally listed ETFs that track international market indices, like the S&P500 and the MSCI World indices, counted towards a retirement fund’s foreign allowance. The announcement effectively presents funds with the opportunity to increase their international exposure beyond the prescribed foreign limits using inward listed ETFs, like the Sygnia Itrix range. While the Financial Sector Conduct Authority has not before prescribed more restrictive foreign limitations than the SARB, it has advised that it will evaluate the impact of the SARB circular on financial conduct sector laws and that no presumption concerning those laws should be formed on the reclassification. In the meanwhile, unless substantive legislation to the contrary is passed, our legally supported stance is to treat inward listed ETFs as domestic assets for purposes of Regulation 28.

The offshore positioning of employer-sponsored funds rests with their boards of trustees, but that choice lies in the hands of individual investors in retirement annuity and preservation funds. Global diversification not only reduces an investor’s dependency on the South African economy, but it also offers access to investment opportunities not available in the relatively small and concentrated domestic marketplace. Generally, members with many years to retirement would favour a higher strategic offshore allocation whereas members nearing retirement would guard against too high an offshore exposure to mitigate currency risk, especially if they plan on securing an income in rands. Ultimately though, the appropriate level of offshore exposure depends on the investment objective, investment time horizon and risk appetite of an investor, and a decision to change that level must be made with care.

No matter what offshore exposure is preferred, the Sygnia Retirement Annuity Fund and the Sygnia Preservation Pension and Provident Funds now offer members the flexibility to increase their effective offshore exposure beyond prescribed foreign asset limits using the cost-effective Sygnia Itrix range of ETFs. This range of ETFs is also available to all other retirement funds looking to do the same.

The domestic reclassification of an inward-listed ETF that tracks a foreign index is a major development that offers retirement funds an opportunity to widen their investment universe and enhance members’ risk-adjusted investment outcomes. And with the rand having strengthened recently, now may be a good time to think about doing so.