In his 2022 budget speech, Finance Minister Enoch Godongwana announced amendments to Regulation 28 of the Pension Funds Act that would allow retirement savings funds to invest 45% of their assets offshore. The ramifications of these changes are significant.

For retirement fund trustees and asset managers, the important thing is that, to paraphrase the comic books, with greater choice comes greater responsibility – and greater need to exercise that choice responsibly.

Investment managers had been calling for Regulation 28’s offshore restrictions to be relaxed for some time. They felt the limits were too restrictive and some were even saying that the restrictions were reason not to go into a retirement fund or a retirement annuity.

The higher offshore limit is good news for investors and savers because it provides greater opportunities for asset managers to seek out high-quality investments across the world. This not only allows portfolios to be more diversified, but also gives investors more opportunities by including companies or industries that are not available in South Africa as well as regions or sectors experiencing high growth rates.

The importance of partnerships in the asset-management industry 

Having more opportunities means that expertise will become all the more important. Across the globe there are tens of thousands of investment opportunities. It’s not possible for asset managers to analyse all these investments and consistently select only the best investment opportunities. As in any country, South African asset managers tend to have a home-ground advantage. They understand the local economy, its nuances and the companies and other instruments on offer.

Competing with asset managers who are experts on their countries investment landscape, is difficult. South African asset managers are adept at selecting from the shares on the JSE. Under the previous limits they could have invested 20% to 25% in offshore equities, This was a relatively small part of the portfolio. Focusing on a few key markets like the United States and Europe may have allowed managers to select from blue-chip global stocks without much risk of getting it too wrong.

Some asset managers also opted for exchange-traded funds (ETFs) to gain broad offshore exposure with no stock selection risk. Now that the limits have been increased and 25% to 45% of a portfolio may move offshore, greater focus needs to be directed to researching the thousands of stocks available around the world. The reality is that few South African asset managers have the in-depth global expertise to do this.

This is why asset managers may have to consider teaming up with offshore asset managers who have the necessary knowledge of their part of the world and partnerships could become important.

Potential impact on fees, or on asset manager margins

The shift in asset allocations introduces another important consideration as the offshore portion of portfolios is often more expensive. Allocating more assets to a more expensive part of the portfolio will push up overall costs, especially if they have partnered with a global asset manager who charges higher fees.

There are ways to manage this, but they will require asset managers to make careful business decisions alongside the purely investment decisions. As an example, using ETFs may help to keep fees low, but when, say, 40% of a portfolio is allocated to passive investments, it may be difficult to justify if the portfolio is marketed as an active portfolio and charging active fees. Absorbing such additional fees by cutting back on margins may be an option but that will have implications for the asset manager and may only be considered when new business can be attracted.

Investment managers may therefore soon find their fees and expertise coming under the microscope.

The Regulation 28 amendments represent a big change, and in the long term they will bring the benefit of more choice, more flexibility, more opportunity and better diversification. But these benefits will only be realised if trustees have selected asset managers who are equipped themselves to navigate this environment.

Visit Old Mutual SuperFund, our leading umbrella retirement fund, for information on the investment portfolios available to employers.