Sne Dlamini, Head of Institutional Clients, Old Mutual Investment Group
Since the increase of the offshore allocation limit of foreign market exposure in South African pension funds from 30% to 45% in 2022, as per Regulation 28 of the Pension Fund Act, data from the Johannesburg Stock Exchange (JSE) shows that most institutional investors have increased their offshore exposure, with 46% of outflows coming from unit trusts.
With the South African retirement industry having an excess of R4.6 trillion in assets under management, the increase in the maximum offshore allocation for retirement funds means that over R2 trillion of pension fund assets is now available for investment in overseas markets.
A framework of consideration for global strategies
When considering how to take their assets offshore, boards of trustees need to balance their global investment strategies with specific challenges that are unique to the South African context. Aside from assessing how to get the best investment outcomes for their members, and how much to allocate to global markets, given the risk of a global recession, they also need to consider if they can balance investing in the future of South Africa and investing offshore. Other factors to consider include global management fees and, ultimately, whether South African asset managers can competitively manage their global strategies.
There are risks in both global and local markets and investors should exercise caution when making the decision to go offshore as achieving the optimum balance of offshore versus local exposures can be complex.
For pension funds that are seeking some global exposure, we outline a framework of consideration below, which takes a South African investor’s perspective in ascertaining the value of global portfolio managers that operate within and outside of the country.
The first pillar in a global strategy framework that pension funds should consider is the critical issue of competitive performance. Historically, there has been a bias towards global managers based in major financial centres such as New York, London and Hong Kong, given their direct access to global companies ‘on the ground’. Locally managed global portfolios have, in the past, often been considered too far removed from the global centres and faced the challenge of not having in-country expertise when it comes to the interactions between companies, sectors and countries and the effects of macro-economic factors. These factors need significant analysis and therefore massively increase the scale of the coverage needed by investment analysts of global markets.
However, the world has changed exponentially over the past few years, including growth in the democratisation of data which has reached new heights since the Covid-19 pandemic. We are living in an increasingly globalised world that is becoming more interconnected by the day – data across the world is accessible regardless of your location and it is now the norm to engage online rather than in person. Fundamental managers are able to gain access to the same data as their globally based counterparts and quantitative investment strategies are on the rise, as they offer the advantage of processing a considerable scale of investment data. All of these factors are driving competitive global investment performance from local managers.
In addition, from an education perspective, South African investment professionals are accessing the same programmes and research as their offshore-based counterparts. Take, for instance, one of the most globally respected qualifications in investment analysis offered through the CFA programme.
The challenge of generating investment performance is a global one and there is no single region that specifically outperforms. This is demonstrated by the below S&P Global chart which looks at how many active funds have underperformed their local S&P equity benchmark. It shows that across the world, the majority of active equity funds have struggled to outperform their regional S&P benchmark over a one-, three- and five-year basis.
S&P EQUITY BENCHMARKS OUTPERFORM ACTIVE FUNDS
* Regional benchmarks included here are large cap, with the exception of Brazil and Chile, where SPIVA results displayed reflect regional broad-market indices. Multiple benchmarks exist in all regions tracked by SPIVA. For more information on SPIVA methodology, including a full list of regional benchmarks and results, visit https://www.spglobal.com/spdji/en/research-insights/spiva.
Source: S&P Dow Jones Indices LLC, Morningstar, Fundata, CRSP. Data as of December 31, 2022. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.
While there is no single region or country that excels at delivering consistent outperformance, interestingly, South African fund managers have fared relatively well as demonstrated by Chart 1 below. This is further demonstrated by chart 2 below, which shows the performance of a composite of local managers, and the Old Mutual Global Managed Alpha Fund relative to the Morningstar universe of peers as well as the MSCI All Country World Index.
CHART 1: SOUTH AFRICAN INVESTMENT MANAGERS VERSUS GLOBAL PEERS
Source: Morningstar EEA Global Equity Large Cap. South African Funds are defined as core capabilities managed by local asset managers. Data to end October 2023.
CHART 2: INVESTMENT EXCELLENCE SPANNING THE GLOBE
Source: Morningstar EEA Global Equity Large Cap. Data to end October 2023
As a whole, local based managers have performed competitively relative to the peer median on a 1 and 5 year basis while lagging on the 3-year number. Our own Global Managed Alpha Fund has delivered 8.2% over three years versus the benchmark at 6.7% at 31 October 2023. We have managed the Old Mutual Global Islamic Equity Fund for 10 years and are humbled by the recent recognition at the Citywire South Africa Awards where long-standing co-portfolio manager, Maahir Jakoet, won in the global equity category against formidable global managers. The Global Islamic Equity Fund has delivered 21.2% over 1 year, 11.7% over 3 years and 8.5% over 5 years as at 31 October 2023.
Sustainable investment practice
One of the concerns that investors have regarding global allocations is the notion of taking away from investment in the future of SA through crucial funding for South Africa’s infrastructure, economic growth, job creation and addressing the nation’s societal problems.
This brings us to the second pillar in our proposed framework of how pension funds should think about the implementation of their global strategies. Incorporating environmental, social and governance (ESG) factors is not only critical, but it’s important that managers execute on a responsible investment strategy that benefits South African retirement fund members. One of the most impactful and far-reaching practices for driving responsible impact is through Stewardship, which entails actively engaging JSE listed companies on ESG issues. At Old Mutual Investment Group, we see Listed Equity Stewardship as: 1) Additive to our pursuit of superior risk-adjusted returns 2) Central to our professional and fiduciary commitment to our clients, and: 3) Part of our commitment to being a responsible investor.
As Old Mutual Investment Group, we manage successful global portfolios, but we unapologetically apply a local lens to stewardship. To this end, , we have identified the Just Transition, Social Inequality including Transformation and Water Resources, as the most pressing systemic issues that require a focus if we are to build a sustainable future for South Africa. This local focus is a critical benefit of investing with a South African manage when taking assets offshore.
Supporting the drive for a transformed financial sector
However, chief among the ESG considerations for boards of trustees when building an inclusive financial sector is a stated requirement of Regulation 28, where retirement funds should incorporate transformation considerations in all investment decision making processes, including their global assets. This forms the basis of the third pillar of the investment framework that should be used when pensions funds are weighing up their options between locally and globally managed global strategies.
To develop our industry and grow black and female talent, it is important for retirement fund trustees to consider placing their global assets with South African-based investment managers. Transformation of the asset management industry, particularly black/women investment professionals, is positively impacted by the support received from SA retirement funds.
Equally important, is that local managers ensure they have both an advanced transformation strategy and the expertise to manage offshore assets that deliver globally competitive results.
Aligning local values
It’s never been a more important time for retirement funds to carefully consider their global investment strategies. Trustees have the power to partner with asset managers that align with their values and vision of what is best for their members. As a black-owned, level 1 B-BBEE investment manager, we are confident that South Africa offers credible asset managers with track records of successfully running global assets, while also having transformation strategies that develop talent and grow our economy.
Ultimately, it is information, knowledge, skills and demonstrating an understanding of running global assets that determine a manager’s investment outcomes and worth, and in today’s rapidly evolving and connected world it would be shortsighted to overlook these attributes based purely on location.