The circular recently issued by the SARB which re-classified exchange traded funds (ETFs) referencing foreign assets as domestic assets caught everyone by surprise. And yet, on so many levels, it is a very clever move, says Sygnia’s Chief Executive Officer, Magda Wierzycka
The circular recently issued by the SARB which re-classified exchange traded funds (ETFs) referencing foreign assets as domestic assets caught everyone by surprise. And yet, on so many levels, it is a very clever move, says Sygnia’s Chief Executive Officer, Magda Wierzycka. It’s a gentle relaxation of foreign exchange controls, which gives South African investors and the economy a much needed boost, whilst retaining the overall limits on how much South Africans can physically externalise. The circular goes as far as to list the categories of investors who can now treat these instruments as domestic, including institutional investors, trusts, partnerships and companies.
Taking a step back, all South Africans saving for retirement in their employer-sponsored retirement funds, retirement annuities and preservation funds have, to date, been restricted to a 30% limit on foreign investments and a further 10% in Africa. The balance had to be invested in domestic assets. Unfortunately, as the economy spiralled downwards, so did the returns from domestic “growth” assets, leaving only government and corporate debt as attractive asset classes. The number of companies listed on the JSE has reduced from over 410 ten years ago to 341 today with many too illiquid to consider realistically. At the same time Naspers and Prosus, on the back of their Tencent exposure, constitute 21% of the JSE. Consequently, many institutional investors already hold more than 30% offshore, predominantly through a single share and some other local stocks with offshore earnings. The mechanism of allowing investors to diversify their strategies through index-tracking ETFs not only enables the potential for more attractive, lower-risk returns, but also does so in a low-cost manner. Given the pedestrian returns from domestic equities and listed property in particular, a boost in investment performance is a boost to the economy.
“Savers feel richer, spend more, pay more taxes, are more inclined to retain their savings in South Africa as opposed to slowly bleeding them offshore, and feel more confident that they will be able to retire in comfort”, says Wierzycka
The most appealing part is that this relaxation affects younger savers and low and middle income groups more than it affects the wealthy. Right now, anyone over the age of 55 who has accumulated significant savings can convert from a retirement annuity to a living annuity and invest 100% of their living annuity’s asset offshore. This development will have the greatest impact on those below age 55 who are still building up their savings.
Apart from being good for investors and encouraging money to stay in South Africa, the reclassification of ETFs tracking foreign markets is also good for the economy. It is unlikely that we will see a flood of money moving offshore as a direct result. As it stands, Regulation 28 permits only 75% of assets to be invested in equities. Very few investors ever reach that limit. Most stick to around a 65% allocation, with 30% of that already being offshore. So, we are only talking about an absolute maximum of possibly 35% moving. In terms of the larger pools of money managed by professional boards of trustees, most boards take the liabilities of the retirement funds into account when designing investment strategies.
Consequently, given that most liabilities are rand-based, one would expect that they would increase the offshore allocation to no more than 45% or 50%. That is not a significant “outflow”, and certainly worth it if it ensures that South Africans save more, do not financially emigrate to access their savings, and are more relaxed about their financial future.
On the negative side, one could argue that any outflows would weaken the Rand. To be frank, given our debt to GDP ratio, a weak Rand is not the worst thing that could happen. At the same time, this relaxation comes at a time when most developed market debt instruments are offering nil to negative yields. Hence any outflows are likely to be more than matched by inflows into the South African bond market.
Magda says, “I know that active asset managers are likely to complain, one argument being that this will weaken the South African corporate sector.”
The South African listed equity market has however been in transition for a long time, with fewer companies listed on the JSE, some of these actively considering delisting, many companies preferring debt funding via the corporate bond market and considerable sums moving to privately held companies.
The JSE should be congratulated for lobbying for this change, and likewise, government should be congratulated for paving the way to a more prosperous future for most investors.