Minister of Finance Enoch Godongwana gave institutional investors a plum opportunity in his February 2022 Budget Speech – a chunky increase in the annual offshore portfolio allowance. Iva Madjarova, Head of Sygnia Itrix, has some ideas on how best to take advantage of this boon.
Minister of Finance Enoch Godongwana gave institutional investors a plum opportunity in his February 2022 Budget Speech – a chunky increase in the annual offshore portfolio allowance. Iva Madjarova, Head of Sygnia Itrix, has some ideas on how best to take advantage of this boon.
Everyone in the financial services industry had cause to celebrate when Minister of Finance Enoch Godongwana announced a 15% increase in the annual offshore portfolio allowance in his 2022 Budget Speech, enabling institutional investors to add more flexibility and diversity to portfolios.
In addition to raising the total offshore allowance to 45%, Godongwana scrapped the requirement to allocate 10% to African markets, allowing trustees to invest the full allocation offshore if they so choose.
Any increased offshore exposure will of course boost a portfolio’s diversification, but it would be foolhardy to simply “invest offshore” for this reason alone. Trustees should add two determining factors when deciding whether to invest part or all of the new allowance offshore: is the investment vehicle strategic and on trend; and is the investment vehicle low cost?
Index-tracking exchange traded funds (ETFs) allow South African institutional investors to invest in a broad range of hundreds – or even thousands – of company stocks overseas at the click of a button ticking all three boxes – plus a few more.
Diversification on steroids
With most ETFs tracking anything between 40 and 2 000 stocks, one can gain exposure to multiple stocks through a single instrument, adding serious diversification to a portfolio while simultaneously reducing risk.
The JSE currently lists 89 ETFs, with new funds being added regularly. With the recent launch of the Sygnia Itrix New China Sectors ETF, Sygnia alone has grown the number of ETFs in its ITRIX range to 14, and it has more in the pipeline for 2022 and early 2023.
It is therefore no exaggeration to say that the introduction of ETFs to the South African market more than 20 years ago opened the world up to domestic investors.
On theme, on trend
Thematic investing via specialised ETFs enables trustees to be highly strategic by gaining exposure to high-growth and high-potential sub-sectors such as the global healthcare innovation and the disruptive tech companies at the vanguard of the 4th Industrial Revolution. With many of these global companies spearheading research and development in their respective fields, thematic ETF investment brings some serious future growth potential to the table.
Furthermore, thematic investment is at the forefront of environmental, social and governance (ESG) trends. While ESG is not a thematic ETF investment in itself, many ETFs incorporate an ESG overlay. With governments worldwide increasingly mandating that ESG factors be written into institutional investment policies, ESG should be a top consideration for any institutional investor.
Maxing return potential
International index-tracking ETFs provide trustees with the Holy Grail of investment opportunities: offshore exposure with rock-bottom fees. But the opportunities to maximise members’ returns via ETFs go beyond the entry-level low-fee consideration.
Firstly, as an emerging market, the long-term view is that the rand will stay relatively weak against the dominant US dollar and euro. As such, a US dollar or euro investment in ETFs is likely to provide greater returns to members when later realised in rands.
Secondly, we have been in a low-return environment for more than a year, and it is likely to continue for the foreseeable future. This makes exposure to high-growth and high-potential thematic ETFs a smart play.
Full access = Real-time responsiveness
As members demand more transparency from trustees in addition to more agile responses to high-growth investment trends, adding offshore ETFs to a portfolio is a win-win.
In terms of transparency, it doesn’t get much better than ETFs, as they can literally be tracked in real time when the markets open (great for obsessively enthusiastic members!).
Furthermore, ETFs are lightweight, agile investment vehicles that can be bought or sold as quickly and easily as any share, allowing institutional investors to pivot quickly when necessary and stay on top of emerging trends and high-growth opportunities.
It is not news that ETFs tick the three basic boxes for offshore investment criteria (diversified, low cost, strategic), but I hope that the “bonus boxes” outlined in this article offer new insights into the wider range of sustainable benefits that ETFs can provide to your members.
Iva’s top 3 ETFs
Sygnia has been bringing ETFs to the South African market since the launch of the ITRIX range in 2016. Its current ITRIX range is diverse, from global tech ETFs to local ETFs (Sygnia ITRIX Top 40 ETF), each providing varying benefits to different investor demographics. It is very hard to choose a top three of Sygnia ETFs for institutional investors, as it depends so heavily on each investor’s specific mandate and members’ varying risk profile. Disclaimers aside, though, here is my top three (at the moment):
Top performance track record: Sygnia Itrix 4th Industrial Revolution Global Equity ETF
This ETF has been a top long-term (3 years +) performer, proving that investing in innovative companies at the forefront of the 4th Industrial Revolution is a sound decision from a growth perspective.
Top high-potential fund to watch: Sygnia Itrix Solactive Healthcare 150 ETF
There are so many healthcare innovations, from genetic sequencing to 3D printing of devices, that it is hard not to be excited about this sector’s prospects.
Top newcomer: Sygnia Itrix New China Sectors ETF
Recently listed (April 2022), this ETF will provide exposure to China’s new economy consumption and service-oriented sectors, which are becoming increasingly structurally important as China’s economy matures.