1 December 2022
By Andrew Brotchie - Managing Director of Glacier International
The case for offshore investing has been increasing over many years, as local investors look for diversification, an increased opportunity set, as well as hedging against political and economic risk. This is by no means unique to South Africa and applies equally to many countries around the world.
Exchange control relaxation
The reasons for offshore investing have traditionally been facilitated by increases in the discretionary allowances. Currently SA investors can take out R11m per year per person. We believe that regulatory relaxation in the institutional space locally will drive the next wave of offshore inclusion for SA investors. A big change announced in February this year, in the institutional space, is that pension fund investors can now have up to 45% invested offshore with no minimum or maximum allocation to Africa.
The increase can be seen as a move towards more alignment between the institutional and retail, or discretionary, space which has seen a number of increases in the annual allowance over the years. This is a positive for investors as over-exposure to an economy that makes up less than one percent of global markets does not allow for sufficient diversification. Even if there are good investment opportunities locally, there is still a strong argument for international exposure. A resilient investment portfolio needs diversification.
Australia, for example, imposes a much lower maximum percentage that Australian citizens can invest into their local market in respect of their pension funds. This forces them to externalise money, and in so doing, their funds aren’t over-exposed to commodities which they would be had they remained heavily invested in their local market.
At an investment webinar held earlier in 2022, asset managers on the panel agreed wholeheartedly – despite their distinctly different approaches to offshore as well as local investments - that mitigating risk through diversification is what investors should prize the highest and that its benefits cannot be overstated. They were also united in their agreement of the limited investible universe in SA.
Pension fund money remains an important source of funding for government, which is part of the reason we haven’t seen more loosening of the annual offshore allowance in the past. We do need domestic savings in order to drive our economy, but at the same time the regulators do acknowledge that individuals’ contractual savings need sufficient diversification – and so a balancing act is needed.
Another point to note from the change announced in February, is that there is no longer a 5-10% difference (which there was previously) between what local collective investment schemes (CIS) could invest offshore versus what was allowed for retirement funds. This has now been harmonised and is significant for the reasons discussed below.
Significant impact on the wealth advice landscape
- A management company (or CIS) will, at certain times, use the full 45% offshore allowance in its retirement funds, which would then leave it no capacity to offer feeder funds. This will lead to a gradual decline in the availability of feeder funds in the SA market. This is also expected to lead to an additional R400 to R600 billion offshore investment flows from South Africa.
- Traditionally local and offshore investment portfolios have been quite separate. Going forward we expect clients to start looking at their investment portfolio holistically. Previously an offshore allocation in pension funds of 30% was typically allocated to global equities. Now that the offshore allocation is at 45% - almost half of the portfolio - the guidance will be more nuanced. For example, one could allocate 30% to global equities and the rest to gold, debt, emerging markets, etc. for diversification. The emphasis going forward will be on looking at the local and international portfolios as one whole, to see how they’ll complement each other. This will, in turn, see the investment process and portfolio construction process change in future.
Glacier International’s solution set
Investment platforms will also need to adapt to these changes. Glacier International’s solution set has been steadily evolving and currently offers a diverse range of options. Investors can select from the offshore wrappers – an endowment (Global Life Plan) and a sinking fund (Global Investment Plan), and we also recently launched The Glacier Offshore Investment Plan. Earlier this year we added a recurring investment option to this solution. With the Offshore Investment Plan, clients still externalise their money and there is no requirement to bring it back.
Uncertainty in the markets is expected to prevail for the foreseeable future. A well-diversified, long-term investment strategy remains key.
