Reimagining South African Retirement: A New Approach
13 May, 2024

Murray Stewart, Head of Structured Products at High Street Asset Management

 

 

 

South Africa’s equity market faces a crossroad, witnessing a steady decline in listed stocks and trading volumes. With JSE-listed companies dropping from over 370 in mid-2018 to 279 presently, the continent’s largest equity market now comprises less than 1% of the global equity market. In contrast, the number of South African funds, including retirement funds, continues to grow steadily, with over 1,700 Rand-denominated funds currently available1.

 

The restricted range of investment options poses a challenge for fund managers, leading to many retirement funds having similar compositions. This trend is particularly noticeable in larger funds, where investment options are further constrained by liquidity limitations. Consequently, these funds often prioritise local investments in large-cap companies within the JSE Top 40 index, leading to similar returns among managers.

 

Below is a graph illustrating the return comparison between ASISA’s South Africa – Multi Asset -High Equity category peer average and a typical local passive benchmark for high equity retirement funds2. The performance of 5 large funds within the category and the High Street Balanced Prescient Fund (“the Fund”) is also included for comparative purposes.

 

Source: ASISA, High Street Asset Management & Bloomberg, 31/03/2024

 

As shown, there is a high correlation between the peer average performance and the passive benchmark, indicating the prevalence of index-hugging within the retirement sector. Moreover, larger peers have generated returns closely mirroring each other. In contrast, the High Street Balanced Prescient Fund has produced returns with far lower correlation to both the peer average and the passive benchmark.

 

Considering the significantly larger investment universe abroad, one might expect active managers to emphasise offshore allocation to differentiate their retirement offerings. However, despite the opportunity presented by the amendment to Regulation 28 of the Pension Funds Act (“Regulation 28”) in February 2022, which raised the maximum allowable offshore exposure from 30% to 45%, there have been limited subsequent increases in offshore allocation amongst fund managers. Historical emphasis on valuations by South African fund managers has led many to be hesitant to shift into more highly valued developed markets, favouring local equities trading at a forward price-to-earnings multiple of 13x compared to 19x for developed markets3. Going into 2024, the average ASISA – South Africa – Multi Asset – High Equity fund’s offshore asset allocation stood at just 32%, well below the threshold4.

 

Amidst this landscape, High Street Asset Management (“High Street”) stands out with its innovative approach. Specialising in offshore and Rand-hedge investments, High Street offers a highly differentiated Regulation 28 compliant fund, which maximises offshore exposure while mitigating South African specific risk. By fully utilising the 45% offshore allocation and exclusively investing in Rand-hedge names such as Richemont and Bidcorp within the mandatory local allocation, the fund achieves over 90% Rand-hedge exposure.

 

The High Street Balanced Prescient Fund offers a unique solution for retirement savers looking to diversify their investments. Many of these savers have the majority of their earnings and assets tied to South Africa, exposing them to the country specific economic and political risks. The Fund provides investors with the means to geographically diversify these risks and protect their global purchasing power.

 

Historically, offshore markets have outperformed local alternatives, buoyed by robust company fundamentals, and sustained Rand depreciation. Over the last 10 years the MSCI World Index has outperformed the JSE All Share Index by over 8% per year in Rands5. In addition, within the JSE, Rand-hedge shares have outperformed their SA Inc. counterparts. While the future trajectory of Rand depreciation and relative offshore performance remains uncertain, High Street remains confident that the superior fundamentals of the Fund’s constituents and their operational geographies are supportive of sustained long-term performance.

 

In conclusion, amidst the ongoing debate between offshore and local investing, High Street remains committed to providing a differentiated retirement solution that aims to protect and grow investors’ wealth on a global scale, thereby mitigating risks associated with the South African market. The Fund has a proven track record of delivering on its mandate and has consistently ranked among the top decile within its peer group, both in terms of returns and the low correlation to the category peer average. This makes it a suitable diversification option for retirement annuities, pension, and provident funds to enhance overall risk-adjusted returns.

 

ENDS

 

Footnotes:

  1. Source: Conlias Mancuveni of Hollard Investments, published on 05/11/2023
  2. The benchmark comprises 75% SWIX All Share Index and 25% FTSE/JSE All Bond Index.
  3. Source: Bloomberg, 31/03/2024
  4. Source: Eleanor Becker of Citywire, published on 01/02/2024
  5. Source: Bloomberg, 31/03/2024

 

 

 

To learn more, visit www.hsam.co.za.

High Street Asset Management (Pty) Ltd is an authorised financial services provider in terms of the Financial Advisory and Intermediary Services Act, 37 of 2002 with FSP number 45210.

Disclaimer: The value of investments may go up as well as down and past performance is not necessarily a guide to future performance. There is no guarantee in respect of capital or returns in a portfolio. See full disclaimer: www.hsam.co.za.  For more information on the key limitations, exclusions, risks and charges related to the financial service offered, please contact Ross Beckley on +27 11 325-4006.

 

 

Author

@Murray Stewart
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