A Solution to Externalise Retirement Savings Beyond South African Shores
11 Jun, 2024

 

Christopher Brownlee, Head of Research, High Street Asset Management

 

Regulation 28 of the Pension Funds Act 24 of 1956 (“Regulation 28”), while designed to manage concentration risk within retirement portfolios, also places constraints on South African investors’ exposure to international markets. The current limit of a 45% direct offshore allowance means that 55% of investors’ retirement savings must be allocated locally. However, the current domestic landscape presents challenges in achieving attractive returns when benchmarked to a global standard. Beyond persistently weak economic growth over the past decade, there are several other contributing factors. Firstly, a shrinking opportunity set with the number of companies listed on the JSE more than halving over the past three decades limiting investor choice. Secondly, a currency that has depreciated at an annual rate of 5.7%[i] against the Dollar leading to an erosion of wealth when measured on a global basis. Lastly, a concentrated investible universe which has constrained larger funds to focus on the largest 40 companies which account for approximately 85% of the JSE All-Share index. These factors act as headwinds for investors seeking diverse opportunities to safeguard the global purchasing power of their retirement savings.

 

Considering the challenging local economic climate, diversifying your retirement savings globally can be a compelling strategy. The S&P 500, for example, has demonstrably outperformed the JSE by an average of 4.4% annually since 1995[ii]. This outperformance, although aided by a weaker Rand, is also due to its composition, encompassing a broad spectrum of industries. These include companies that are global frontrunners in technological innovation such as Apple, Amazon, and Nvidia that have all produced annualised returns of over 25%[iii] in USD over the last 20 years.

 

The High Street Balanced Prescient Fund (the “Fund”) aims to maximise offshore exposure whilst remaining within the constraints of Regulation 28. This dual objective is achieved by fully utilising the 45% offshore allowance and investing in Rand-hedge investments with the remaining 55% mandatory local component. These include South African companies generating most of their income in foreign currencies, such as Bidcorp and Richemont, or dual-listed companies, including Glencore and Anheuser-Busch. To meet its 90% Rand-hedge objective, the Fund also invests in Rand-hedge listed property, with no South African operations, and select commodities. Essentially, the Fund serves as an effective geographic diversification tool for domestic investment portfolios and stands out as a key differentiator crafted for retirement savers seeking to maximise offshore exposure.

 

Figure 1 High Street (30/04/2024)

 

Since the Fund’s inception in December of 2018, it has produced an annualised return of 15% vs the benchmark[iv] of 8%. As of 30 April 2024, it is ranked 3rd of 221 over 5 years within the ASISA South African – Multi-Asset – High Equity categoryv. While the Fund’s headline volatility, measured by annualised standard deviation, is higher than the category peer average, this is primarily driven by fluctuations in the Rand-USD exchange rate. When the Fund’s performance since inception is measured against Rand-denominated global balanced funds (ASISA Global – Multi Asset – High Equity category), the volatility is lower than the category average. This aligns with our proposition to offer retirement savers a fund which is more comparable to its offshore peers.

 

Figure 2 High Street (30/04/2024)

 

The Fund is suitable for both retail and institutional investors and caters to a diverse range of investor aspirations whose aim is to mitigate South African-specific risks such as:

  • Investors seeking greater offshore exposure without the need to trigger tax payments associated with early redemptions.

 

  • Young professionals saving for retirement benefitting from material tax deductions linked to periodic contributions.

 

  • Individuals planning to emigrate and benchmark their wealth to a global standard.

 

The Fund is available directly through Prescient Fund Services or via a selection of other established platforms such as ABSA, EasyEquities, Glacier, Momentum, FundsAtWork, Momentum Wealth, Ninety One, Stanlib INN8 and Sygnia.

 

This high-conviction fund, benchmarked against a global standard, stands out as a differentiated option for retirement savers. By employing a concentrated approach focused on international or Rand-hedge revenue streams, it offers diversification beyond a traditional model portfolio and low correlation to typical Regulation 28 funds. To learn more, visit www.hsam.co.za.

 

[i] Bloomberg (30/04/2024)

[ii] Bloomberg (30/04/2024)

[iii] Bloomberg (30/04/2024)

[iv] Benchmark (ASISA South African – Multi-Asset – High Equity category)

V Funds Data Online (30/04/2024)

 

ENDS

Author

@Christopher Brownlee, High Street Asset Management
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