South Africa’s largest asset managers have warned that changes to the country’s offshore investment rules will lead to an exodus of capital from the country.
An amendment to prudential rules announced in February’s budget enables pension and mutual funds to invest 45% of their assets abroad, up from 30% previously. That’s the largest adjustment yet made to the offshore limit and gives South African investors the chance to fundamentally re-balance their portfolios.
Simply put, this means that there is now just one prudential limit for South African institutional investors of 45% exposure to foreign assets. It is therefore theoretically possible to comprise the foreign exposure of an institutional investor entirely of African or non-African assets.
The change means anywhere between R550 billion – R800 billion could leave the country over the next five years, said RMB Morgan Stanley in a recent research note.
Speaking to BusinessDay, asset manager Ninety One puts the figure between R400 billion and R600 billion, with the group noting that local companies are set to miss out on funding as capital leaves the country.
“In South Africa, we sell a lot of offshore feeder funds, which are sold on the back of having capacity that is higher within the investment collective scheme than individual retirement funds themselves,” Sangeeth Sewnath, said deputy managing director of Ninety One
“The relaxation of the offshore limits is absolutely great for clients. But the industry, regulators and underlying investors need to make sure they are properly prepared for its implications.”
Money managers have previously jumped at opportunities to increase their offshore exposure. But with global markets in flux as a result of Russia’s invasion of Ukraine, and South Africa benefiting from a stable rand and a rise in commodity prices, it’s not an easy decision this time around.
“For any mandate, be it equity, multi-asset or otherwise, the increase of the potential allocation to offshore assets has important consequences,” said Adam Bulkin, head of manager research at Sanlam Investments Multi-Manager.
“As the potential range of allocation increases, the variability of returns naturally becomes greater, particularly as foreign exchange moves in relation to the rand are volatile and potentially great in magnitude. Added to this is the variability of returns within asset classes, such as offshore equities and bonds, driven by factors such as styles, sectors and regions.”
The result is that a manager’s allocation capability with respect to offshore versus domestic assets becomes an even more important consideration in assessing that manager’s skill, as does the manager’s instrument selection within the pertinent offshore asset classes, he said.
“We believe that this increase in allowable offshore exposure means that there are more degrees of freedom and choices available. For us, this means that managers must take more intentional, explicit and active decisions in their offshore allocation.”
He added that the change will introduce greater variability of returns both broadly within funds in general, but also within peer groups.
“It is likely that many managers may increase their strategic allocation offshore in somewhat of a static manner – meaning they will structurally increase their offshore exposure.
“This could imply, more volatility as foreign exchange rates are magnified, but also that those managers who are more active in their offshore versus domestic calls will have the potential to increase their out- or under-performance depending on the success of their positions.
“Moreover, those managers with domestic-only mandates within a particular peer group will also have more markedly different performance from those who have offshore allocation.”