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National Treasury has announced an increase in the limits for offshore investments by collective investment schemes (CIS), investment managers and long-term insurers from 35% to 40%, and an increase from 5% to 10% for investment into the rest of Africa.
It is this allowance that CIS managers use in their funds that have offshore exposure, including rand-denominated feeder funds.
This explains why managers are required to close their feeder funds to new investments when the allowance has been exceeded.
Importantly, this change to the offshore investment allowance also has the effect of immediately changing Regulation 28 of the Pension Funds Act, which sets the asset allocation limits for individual retirement funds.
As a result, the maximum offshore exposure for a Regulation 28 fund will increase to 30% and to 10% for the rest of Africa.
This is to be welcomed as research has shown that, for many investors, the optimal allocation to offshore assets is more than the somewhat arbitrary 25% previously allowed in terms of Regulation 28.
BNP Paribas illustrated that for real return mandates from inflation plus 4%, a strategic allocation of at least 28% to foreign assets, rising to 50% as the required return above inflation rises, is optimal.(See graph.)
While the optimal strategic allocation to foreign assets will depend on each investor’s personal circumstances, risk profile and longer-term financial planning objectives, the evidence suggests that, for many, it is at least a third of their assets.
Interestingly though, many institutional investors have not reached the current limit of 25%. The offshore exposure of the average multi-asset high-equity fund is substantially underweight the existing limit at approximately 15%, and exposure to Africa is negligible (as at 28 February).
Therefore, while this additional flexibility is to be welcomed, it appears that many institutional investors still favour South African-domiciled assets – which may themselves derive differing degrees of offshore revenue.
The Investec Opportunity Fund is different
The Investec Opportunity Fund, by contrast, is at maximum offshore exposure, as high-quality global equities remain portfolio manager Clyde Rossouw’s favoured investment.
These shares represent a balance between old economy staples like Nestlé and Johnson & Johnson, and exciting higher-growth opportunities like Visa and Booking Holdings (formerly Priceline, and the owner of Booking.com).
What these businesses have in common, apart from their prodigious cash generation and exceptional returns on capital, is an ability to grow with a lower dependence on the economic cycle than the average business.
Rossouw explains: “As investors are exposed to a narrow and concentrated opportunity set in South Africa, we believe that adding a quality offshore component to an SA portfolio provides complementary exposures.
This forms an integral part of diversification. Aside from the complementary exposure benefit, we are finding superior businesses offshore that have proven their ability to deliver high-quality profits, sustainable growth in earnings and cash flows, and high returns on invested capital.”
The Investec Equity Fund is also different!
While not strictly a fair comparison as a number of equity unit trusts funds have domestic-only mandates, it is interesting to note that the Investec Equity Fund has 19% invested in offshore assets.
This is because, even though equities with exposure to SA (banks and retailers) are currently offering a great investment opportunity (thanks to our positive political developments and foreign investors looking favourably at the country again), we focus on building a well-diversified equity portfolio with a combination of the best opportunities available to us.
Co-portfolio manager of the Investec Equity Fund Hannes van den Berg explains: “The South African FTSE/JSE All Share Index is a small and narrow emerging-market index relative to global developed-market indices.
Having exposure to global equities gives the fund access to unique opportunities not available in our local market, which complements the investments already in the fund.
“The next time there is a real global growth scare, where all emerging-market currencies come under pressure, we are going to want to have money offshore that will benefit from the rand weakness that will then follow.”
While welcoming the increased offshore allowance, Van den Berg noted: “There is a lot of momentum currently behind SA, and inflows from foreign investors can continue to support a stronger rand for some time. As a result, we will not be increasing our offshore exposure in the Investec Equity Fund as yet.”
Paul Hutchinson is a sales manager at Investec Asset Management.
This article originally appeared in the March 2018 edition of FundFocus. Buy and download the magazine here or subscribe to our newsletter here.
