Race offshore is off to slow start – Franklin Templeton

There is little sign of a race offshore by South African institutions, despite recent changes to National Treasury’s foreign investment ceilings and Pension Fund Act amendments permitting up to 25% of fund assets to be channelled into international markets.

The assessment comes from Franklin Templeton South Africa, local arm of the global asset management company and a firm close to international diversification sentiment in view of its strong focus on investment research. As a result of global reach, representation in numerous markets and respected research credentials, the firm is often consulted by major institutions.

Tanya King, Business Development Manager at Franklin Templeton SA, noted: “The retirement fund ceiling went up 5% to 25%. That’s a significant increase permitting a sizeable adjustment in portfolio allocations.

“The change came after a prolonged period of relative rand strength to the US dollar, creating what some may see as a timing opportunity. But these factors have yet to translate into anything resembling a race offshore.”

In December when Treasury upped the ceiling to 25%, it was seen by some as a hint to pension fund trustees that a review of international diversification strategy might be warranted.

Reviews appear to be under way in some instances, said King, but substantial changes in offshore weightings have so far been rare.

“Our estimate is that the average offshore allocation falls into a narrow range between 13% and 14% of the total investment portfolio,” said King. “Few funds were pushing the old 20% ceiling before the December decision.

“We know of very few funds that raced to exploit the new dispensation and now have 25% of assets invested offshore. Many are still reviewing this issue with their consultants.”

Franklin Templeton’s local team advanced two reasons for lack of rapid uptake – past disappointments and recent strong performance by domestic equities.

Initial relaxation of foreign exchange control in 1997 occurred toward the end of a long bull run on the US stock exchange. South Africans who invested at the peak lost money. Four years later, with the rand in freefall against the greenback, many South Africans bet the trend would continue only to record losses when the rand strengthened.

King added: “In these circumstances, commitment to the domestic market may seem prudent to many trustees and their advisers. However, there have been significant changes to developed and emerging markets in the last 10 years and a strategic review is certainly warranted, especially if portfolio allocations have remained static for some time.

“There is no need to stampede offshore, but taking time out to explore new possibilities may prove timely.”