Sinister motives blamed for sudden U-turn on offshore investment limits

Sygnia CEO Magda Wierzycka is blaming the “monopoly of large asset managers” for the government’s decision to backtrack on allowing a higher ratio of offshore investments for pension funds.

The issue relates to Regulation 28 of the Pension Funds Act, which is aimed at protecting individuals’ retirement savings through responsible fund management.

Regulation 28 stipulate how pension money can be invested by limiting equities to 75%, listed property to 25%, and offshore exposure to 30%.

The 30% offshore exposure restriction has been criticized for years because of South Africa’s sluggish growth.

It was therefore welcomed when an explanatory note linked to the Finance Minister Tito Mboweni’s mid-term budget speech stated some inward listing instruments will be classified as domestic.

“All debt, derivatives and exchange-traded instruments referencing foreign assets, that are inward listed, traded and settled in Rand on South African exchanges, will be classified as domestic. The classification of all inward listed shares denominated in Rand remains domestic,” the note said.

The South African Reserve Bank (SARB) also issued a circular which re-classified exchange-traded funds (ETFs) as domestic.

Approved inward listed shares, including exchange traded funds as well as debt and derivative instruments, traded and settled in Rand on a South African exchange, are classified as domestic.

Legal opinion obtained by Sygnia confirmed that the SARB re-classified inward listed ETFs referencing foreign assets as domestic assets for institutional investors, trusts, partnerships, and others.

It would therefore allow pension funds to increase their international equity exposure beyond the 30% limit by investing in JSE listed ETFs which reference foreign assets.

The jubilation from investors looking to increase their international exposure was short-lived.

This week the SARB, National Treasury, and the Financial Sector Conduct Authority (FSCA) backtracked on the previous circular.

These institutions said they intend to review Exchange Control Circular 15/2020 issued by the SARB on 29 October.

As such, the circular with the reclassification of inward listed instruments was suspended with immediate effect.

An amended circular will be issued following a period of public consultations and all approvals granted by the previous circular has been suspended.

Big disappointment

Sygnia CEO Magda Wierzycka said she is bitterly disappointed by the government’s decision to backtrack on the SARB circular.

Speaking to ENCA, she said allowing more offshore exposure through locally listed ETFs would be good for the economy.

Over the past decade, the JSE gave a far lower return than what the international market offered investors.

“Over the past 10 years, the average return from the JSA all share index have been 8.7% per year,” Wierzycka said.

“The return of the MSCI world index, in rands, have been 18.8% per year – 10% higher than the JSE.”

On a 10-year compounded basis this equates to a 300% difference in return. “You would be 3 times richer if you invested internationally,” she said.

She said instead of restricting offshore investments for retirement funds, it would be far better to allow investments which yield the highest returns.

This will allow investors to grow their money, feel wealthier, and have more security in their retirement savings.

This security and bigger wealth creation will result in people spending more on products and services from South African companies.

It will also prevent people from rushing into financial emigration, which has become a common theme.

Monopoly of large asset managers to blame – Wierzycka

Wierzycka blamed the “monopoly of large asset managers” for the sudden change of heart by the Treasury and the SARB.

Wierzycka explained the relaxation of foreign exchange controls allow investors to diversify their investment strategies in a low-cost manner using index tracking funds.

“From the perspective of an active asset manager this is ostensibly a disaster,” she said.

“Where ETFs charge low management fees for their market certain returns, active managers charge high fees for the possibility of outperforming the market.”

“Active asset managers cannot launch these products, as it would be seen as an acknowledgement of the failure of active management.”

Furthermore, if investors take more money offshore using ETFs, that money is likely to flow from the domestic portion of their savings, which is mostly managed by active asset managers.

Even before the SARB and National Treasury backtracked on the circular, she predicted that no active asset manager will celebrate the SARB declaration.

The sudden retraction and review of the exchange control circular did not sit well with Wierzycka, which she blamed on large asset managers.

“Instead of lobbying for possible expansion of Excon Circular allowing savers to invest offshore, they stop it in its track,” she said.

The SARB is currently soliciting comment as part of their review process of ETFs referencing foreign assets.

“Sygnia will be providing a comprehensive comment as to why the Circular is in the best interests of SA investors and South Africa,” Wierzycka said.


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Sinister motives blamed for sudden U-turn on offshore investment limits