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Do large asset managers have your client’s best interests at heart

30 November 2020 Gareth Stokes

Exchange Control Circular 15 of 2020, issued by the South African Reserve Bank (SARB) governor on 29 October and subsequently suspended to allow for further public consultation, has resulted in a fair amount of mud-slinging by advocates for more relaxed exchange controls. Magnus Heystek, a director at Brenthurst Wealth and long-time champion of offshore investing, was joined by Magda Wierzycka, CEO at Sygnia Asset Management, in a hard-hitting biznews.com radio interview with Alec Hogg, broadcast 26 November 2020.

From annoyed to incensed

The pair were annoyed by the SARB decision to suspend the circular; but incensed by what they believe to have caused the central bank to do so. A Sygnia media release, received 26 November explains: “Proof has come to light that a handful of members of the Association for Savings and Investment South Africa (ASISA), a lobbying body purporting to represent all asset managers, unit trust companies and life insurers, wrote to the Financial Sector Conduct Authority (FSCA), National Treasury and SARB demanding the suspension of Circular 15”. The media release was accompanied by a copy of ASISA’s correspondence to the regulator. 

The regulators have not commented on what prompted their decision; but confirmed that the circular was withdrawn to allow them “to reduce the scope for ambiguity related to compliance with the prudential framework for regulated funds”. Those were similar the concerns raised by ASISA. ASISA has not admitted or denied its interference; but has issued its own statement under the heading ‘ASISA welcomes the public consultation process on the classification of inward listed instruments’. 

FSCA compounding the confusion

ASISA CEO, Leon Campher, also acknowledged Sygnia’s unhappiness. “We are aware that one of our member companies feels aggrieved by our request for guidance; but we believe that this was the responsible approach and in the best interest of investors,” he said. A review of the facts suggests that the FSCA was as much to blame as ASISA for the decision to suspend Circular 15. Their 13 November comment on the matter held that “the inward listing of all instruments on a South African exchange remains extant” and that “no presumptions pertaining to Financial Sector Conduct laws should be formed on the reclassification”. 

According to Campher, the FSCA notice created uncertainty among portfolio managers in applying the changes proposed in the circular. He said that the confusion centred on how the more consistent treatment of inward listed debt, derivative, equity and ETF financial instruments would affect compliance with the prudential requirements contained in Regulation 28. Sygnia has since commented that the legal effect of Circular 15 on Regulation 28 was clear, based on an independent legal opinion. But we should not allow this media release back-and-forth to distract us from reporting on the heated radio debate. 

A decade of growth has been deleted

Hogg introduced the fast-paced discussion by reflecting on some of the facts. “Circular 15 removed the 30% cap on the foreign investment portion of retirement annuities … it rescinded the requirement that up to 70% of your retirement fund money had to be invested in a narrow pool of poorly performing assets, mostly listed on JSE,” he said. It was felt that such changes would benefit all South African retirement fund savers by allowing them to increase their overseas investment exposure to above the current 30% limit established in Regulation 28. Why then, did the SARB back away from the proposals so swiftly? Wierzycka referred to articles in Business Day to support her view that Coronation and Ninety One were among the large asset managers that pressured ASISA to lobby the regulator. 

She contended that the circular, as published, would have an adverse impact on bonus pools and management fees at some large asset managers, hence their unhappiness with it. “These asset manager [are] not acting in the best interest of investors, they do not take treating customers fairly principles seriously and have decided to close the door before money started flying out,” she said. Exchange controls were vilified as a “great prejudice to South African savers and South Africa in general” for not allowing appropriate global diversification. The JSE All Share, measured in US dollars, has returned close to zero, before fees, over the past decade. The MSCI delivered 8.7% per annum over the same period. “A decade of growth has been deleted as far as South African savers are concerned; what rational person, other than someone motivated by personal greed, would attempt to block the relaxation of foreign exchange controls?” asked Wierzycka. 

South Africa’s retirement funding crisis

Heystek was as much concerned with the poor returns generated in domestic retirement annuities as with the lacklustre JSE. “There is crisis developing in retirement funding; we frequently see people walking into our practice waving preservation fund or retirement annuity fund statements that show zero nominal growth over five to eight years,” he said. Although his ‘offshore everything’ approach has made him unpopular with some fund managers and IFAs, his observation on sub-optimal retirement funding outcomes cannot be faulted. “It is a travesty for the average savers in those funds, who are always told: The fact that you are underfunded at retirement is your fault because you are not putting away enough money,” continued Heystek. What possible sense is there in preventing these long-suffering fund members from investing in cheap, dynamic and exciting global ETFs? 

A number of asset managers have, over time, criticised Regulation 28 for restricting them to a shrinking investment universe. The South African economy makes up only around 1% of the global economy. To make matters worse there are only 40 or so JSE-listed shares with enough market capitalisation to vie for large asset managers’ attention. “We have seen a huge number of de-listings from the JSE … the options open to investors, even asset managers, to manage their equity exposure has shrunk … and the investment universe is limited,” said Wierzycka. 

It seems insane to press ahead with the status quo given the obvious damage caused by the 30% offshore cap to South African savers. Heystek said that the SARB circular was well-considered and reinforced by National Treasury. “It appears that a great deal of thought went into those discussions; the circular was not only concerned with inward listed instruments such as ETFs, but also loop structures and other issues which impact on the greater economy,” he said. Sygnia was more critical. They wrote that large asset managers, acting in an anti-competitive manner, had just stopped every investor in the country from accessing additional offshore investments.

Self-interested turf protectors…

“The large active managers are currently congratulating each other on successfully protecting their turf, with no concern that their self-interested actions have prejudiced the rights and investment growth of ordinary savers and breached the trust placed in them to act in the best interests of their clients,” concluded Wierzycka. The suspension of the circular also prejudices smaller emerging asset managers, who due to size constraints, only manage local asset portfolios. With the local investment universe being so limited, the opportunity to include inwardly-listed foreign ETFs would have expanded their opportunity set significantly and allowed them to compete better with the established large players. 

“We believe that [the suspension] is the correct approach as it will allow all stakeholders to make representations,” concluded Campher. “We are in the process of constituting a working group, which will consist of representatives from all interested member companies, and we will submit their majority and minority views”. The window for public comment is open until 15 December 2020. Both Heystek and Wierzycka have undertaken to make representations to the regulators. 

Writer’s thoughts:
We have recently encountered some rather hostile responses from IFAs who appear to view aggressive offshoring as anti-South African. Whatever one’s view, it is becoming increasingly difficult to argue that the shrinking pool of equity investments on offer domestically is sufficient for the size of our investment industry. Are you for or against a decision that would remove some of the offshore investing constraints contained in Regulation 28? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

Comments

Added by Ben Holtzhausen, 30 Nov 2020
The Reg. 28 restrictions should be relaxed as a matter of urgency. The Financial Services Industry has become so much over-regulated that many forms of regulation do more harm than good, especially to those it was intended to protect.
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Added by Gareth Stokes, 30 Nov 2020
Free market is better; except, it seems, when your economy is massively uncompetitive... Given SA's macroeconomic backdrop we should be grateful the debate is about freeing things up rather than re-introducing restrictive controls.
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Added by Gareth Stokes, 30 Nov 2020
Free market is better; except, it seems, when your economy is massively uncompetitive... Given SA's macroeconomic backdrop we should be grateful the debate is about freeing things up rather than re-introducing restrictive controls.
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Added by Harley Ritz, 30 Nov 2020
Regulation 28 is hogwash, designed to hurt the very members its suppose to protect. Campher, FSCA, SARB - the members of the funds have spoken out against Reg 28 - listen to what the members want. Its apparent that both Heystek and Wierzycka know whats best for the Members of RA & Pension Funds. All you doing is growing a poorer nation with no incentives to invest for ones Retirement Years !
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Added by Paul Chinchen, 30 Nov 2020
Surely the more free the market and the less restrictions the better.
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