How have changes to regulation 28 affected SA's investment market?

The recent SA Reserve Bank amendment to regulation 28’s foreign investment limits, which now permits retirement funds to invest 45% of their assets overseas, has introduced an expanded realm of opportunities and a heightened level of risk.

Over the past year, the change has shifted the focus of SA asset managers from a saturated domestic market to the expansive global one.

The global equity market is vast, featuring about 58,200 listed equity instruments in worldwide public markets alone.

The standard barometer for global equity performance, the MSCI all country index (ACWI), comprises about 3,000 constituents across 23 developed and 24 emerging markets, with SA classified as an emerging market.

This expansion of potential investments has created an unparalleled diversification opportunity for retirement funds, which can now explore a broader investment arena relative to the roughly 160 shares that make up the JSE all share index — only about 40 of which are liquid enough to trade. The increased competition has fostered innovation, with firms racing to introduce more inventive products.

However, has the enlarged overseas investment field genuinely enhanced performance? And which investment strategy is leading the global race — passive or active funds?

Playing against the odds while grappling with outperformance

As we navigate this expanded investment landscape, it is important to recognise that SA asset managers are skilled and highly professional. Yet it is worth questioning whether active managers, accustomed to the narrower SA equity market, can replicate their success on the global stage.

When looking at the S&P Indices Versus Active (Spiva) research report that measures actively managed funds’ performance against their index benchmarks worldwide, the S&P indices consistently demonstrate that active managers struggle with outperformance — and SA managers are no exception.

The recent Spiva report for SA revealed that most active managers failed to outperform in each category during the first half of 2022. The majority of funds in the global equity category underperformed the S&P Global 1200 benchmark index, with underperformance escalating over time. 

Sygnia's investigation of SA managers' global performance aligns with the Spiva findings and is also evidenced in the fund excess returns chart.

Our research focused on established industry giants: large asset management firms with robust track records. These firms, armed with extensive research teams, significant resources and generous budgets, are deemed most likely to succeed.

However, when looking at the excess fund returns over the benchmark returns, investment performance deteriorates over time. 

We evaluated their performance against the MSCI ACWI benchmark as of January 31 2023. Only two managers surpassed the benchmark over five-, seven- and 10-year periods.

Considering survivorship bias, the reality is likely even grimmer — only the relatively successful managers remain. It is also worth noting that these figures are pre-cost.

While the SA Reserve Bank’s amendment has undeniably fostered increased freedom, competition and innovation, it is crucial not to overlook the inherent risks for SA managers actively investing abroad. 

So, who is leading in the global competition? The data suggests that while active managers may add value in short-term cycles on a gross-of-fee basis, their long-term performance is inconsistent. Adding an allocation to passive themes appears more likely to yield superior net-of-fee returns.

The only thing investors can be certain of in an uncertain market environment is fees. Therefore, incorporating a lower-cost fee structure (such as a global passive component through Sygnia Itrix exchange traded funds or global unit trusts) can provide investors access to varied geographies at a reduced cost, enhancing the likelihood of outperformance and better financial outcomes.

Source: https://www.businesslive.co.za/bd/markets/2023-06-20-native-how-have-changes-to-regulation-28-affected-sas-investment-market/