Ross Beckley, Chief Investment Officer at High Street Asset Management
Regulation 28 of the Pension Funds Acti (“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, despite the JSE All-Share Index (“JSE”) accounting for less than 1% of the global equity market. Stagnant economic growth has hindered local market returns over the past decade resulting in Regulation 28 compliant funds underperforming their global peers. However, boutique managers with access to a larger investible local universe have been able to mitigate the difficulties of the local economy by investing in select Rand-hedge opportunities.
Locally, a concentrated investible universe has constrained larger funds to focus on the biggest 40 companies which account for approximately 85% of the JSE. Boutique asset managers, such as High Street Asset Management (Pty) Ltd (“High Street”), have the benefit of accessing a larger investible universe which includes Rand-hedge opportunities in both the local equity, and more importantly, the locally listed property markets. Boutiques can invest in the latter opportunity set while being able to exit positions within a week versus large funds which could take over 2 years. Essentially, most Rand-hedge property shares are uninvestable for larger funds owing to liquidity constraints.
GDP growth is the primary determinant of earnings growth over the long term. These earnings, coupled with the subsequent dividends paid to investors, are responsible for the majority of shareholder returns. The valuation that a share or market trades on becomes less relevant the longer the performance measurement period. Ultimately, the economic growth of the regions in which a company operates becomes the primary factor in determining shareholder returns.
South Africa’s GDP growth, and subsequently market returns when measured in the same currency, have been roughly in line with the United States over the past two decades, although it has been a tale of two halves. From 2003-2013, South Africa’s GDP grew at 3.4% per annum, which is a commendable achievement by international standards. This led to earnings-per-share growth of 19% per year for the JSE. Yet, over the last decade, GDP growth slowed to 0.6% per annum, which saw earnings-per-share growing marginally above inflation at 7% per annum. If one were to remove the Rand-hedge contributions from this figure, it would be considerably lower.
The High Street Balanced Prescient Fund (the “Fund”) aims to always maximise offshore exposure and mitigate local risks 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.
Figure 1 High Street (30/04/2024)
An important distinction is drawn between the two types of Rand-hedge investments. Internal and external Rand-hedges both generate returns in non-Rand currency, however, external Rand-hedges (such as Bidcorp and BHP Group) have limited operational exposure to South Africa when compared to internal Rand-hedges (like Kumba Iron Ore and Amplats). Over the past decade, external Rand-hedges have significantly outperformed which highlights the importance of considering where these companies operate, as opposed to merely the currencies in which the revenue is generated.
With a one-year performance of 19.41% compared to the benchmark of 10.25%, and an annualised return of 14.59% over five years relative to the benchmarkii of 8.89% (B1 class data as of 28 June 2024), the Fund is a top performer in the ASISA South African – Multi-Asset – High Equity categoryiii. Notably, this was achieved over a period when the Rand depreciated by less than its long-term average against the US Dollar, suggesting that performance is not solely reliant on a weak Rand. Interestingly, the primary determinant of returns came from an earnings uplift owing to the strong economies in which the Fund’s underlying investments operate. That said, the Fund has generated significant alpha during periods of material Rand weakness, as one would expect given the Fund’s 90%+ Rand-hedge focus.
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 compliant funds. It is available directly through Prescient Fund Services or on most major platforms.
To learn more and for information on the relevant charges, visit www.hsam.co.za.
ENDS
Sources
All figures stated above were extracted by High Street Asset Management from Bloomberg on 28 June 2024, with exception to the below:
iPension Funds Act 24 of 1956
i[1]Benchmark (ASISA South African – Multi-Asset – High Equity category); data captured on 28/06/2024.
iii Funds Data Online (30/04/2024)
