Not too long ago discussion on the changes of Regulation 28 centred on looming anxiety about the ruling party planning to prescribe assets, particularly as their manifesto spoke to mobilising funds within a regulatory framework for socially productive investments (including housing, infrastructure for social and economic development, and township and village economy). February’s announcement came as a surprise when National Treasury made the decision to harmonise the offshore limit for all insurance, savings, and retirement funds. In the Budget speech, Finance Minister Enoch Godongwana announced an increased allowance from 30% to 45% and simultaneously collapsed the 10% African allowance.
Regulation 28 – which stipulates the maximum limits on the various asset classes and other criteria – had become a contentious issue of late, with proponents seeing the piece of legislation as an effective mechanism in protecting pension money against high-risk investments or an inadequately diversified portfolio. Criticism, however, came from investment managers who found certain aspects of the legislation restrictive and disempowering, with the consequence of lowering potential returns given the caps imposed. One can easily look at the last 10 years return of the JSE versus the return of global peers and see the increased opportunity cost linked to lost returns.
A 50% increase in the offshore limit is a great change for investors over the long term. Investors can diversify their current investments further and hedge their future savings against the local economy and the rand. Investment managers also have greater flexibility when it comes to deciding on asset allocation. They are able to allocate capital to some multinational businesses not listed on the SA exchange, thereby lowering the dependence on the SA economic cycle, and increasing the benefits of diversification.
Regulation 28 mandates, although not fully making use of the 30% allocation (26% as per ASISA at 31 Dec 2021), are expected to gradually increase their offshore assets and rebalance portfolios. Particularly as managers search for businesses with a lower dependency on economic cycles and as the South African opportunity set continues to narrow (in 2021, the JSE experienced 21 delistings and only seven new listings up to November). Assuming a full scale up of offshore assets from 30% to 45%, SA assets could see approximately R550 – R800 billion in potential outflows (per RMB Morgan Stanley Research). ASISA estimates the outflows to be smaller at R444 billion. Regardless of size, we do not estimate the change to be an immediate step change, particularly as US stocks screen as expensive when compared to history and Europe’s growth outlook remains challenged given elevated energy prices.
Previous offshore investment limit changes only saw 5% increases: from 20% to 25% and then 30% (in 2010 and 2018). An announcement of triple the previous increase in size is definitely a positive development, demonstrating that the government is happy to reduce exchange control regulations. 36ONE is extremely pleased with the flexibility to allocate a higher percentage to foreign assets and complement our SA exposures with a quality offshore component. Our portfolio allocation process, however, will not change. We will not target an absolute percentage. We will continue to weigh up relative opportunities at a stock and asset class level and allocate based on the best opportunity at the time. If SA is more attractive than global equities, then we will have more SA exposure. If global becomes more attractive, then we will make use of the higher limit. This change also comes at an opportune time for us as 36ONE continues to expand our global capabilities, including a new hire in August 2021 focused on offshore investments.