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New offshore limits to retirement portfolios come at a bad time

04 April 2011 Mazars

Investors in retirement funds whether retirement annuities (RAs), pension funds or provident funds, will now have to restrict their total exposure to offshore assets to 25% of their portfolio. While this is an increase over the previous limit of 20%, many investors will actually have to reduce their offshore exposure to bring it in line with the new limit.

This is because previously, asset class limits were set at the fund level by certain administrators and not at the level of individual members. As long as the total portfolio of a fund held offshore assets of only 20% (now 25%), individual members could, and many did, have much higher levels of exposure. And with offshore equities offering better value than local equities currently, the timing is bad, says Marius Fenwick, Chief Operating Officer of Mazars Financial Services, the investment arm of global audit, tax and advisory firm Mazars.

“There are sound reasons for applying the limits at member level, and the intention of safeguarding retirement capital is laudable. But serious investors need to look at ways to continually grow their portfolios and right now the smart money is going offshore,” Fenwick says.

The new limit arises from the amendment to Regulation 28 of the Pension Funds Act, which came into force on 1st April; it sets out the maximum allowable exposures to the various asset classes including offshore assets.

“At a time when there is little value to be found on the FTSE/JSE, the new offshore limit, and the fact that it is to be applied at member level, is unfortunate,” says Fenwick.

“In the current environment, we’re advising our clients to hold a minimum of 40% of their portfolio in offshore assets, particularly equities which are offering better value than local shares,” he says.

A solution is to have a voluntary investment portfolio in addition to your retirement portfolio. “It’s never a good idea to only have compulsory savings as, at retirement, you can only access one third of your capital as a lump sum. Ideally your savings should be equally split between retirement funds and voluntary investments, particularly now that your offshore exposure has been restricted.”

When it comes to structuring your portfolios, Fenwick says your compulsory portfolio should be broadly biased towards local, interest-bearing assets (specialist Income Funds, Property Funds, Bonds and Cash) to take advantage of the tax benefits within the Pension Fund Act regulated funds, and your voluntary portfolio should be offshore and equity biased for the growth portion of your investment.

This needs to be done in an orderly manner taking your overall investment portfolio into consideration. The general rule of retaining certain cash levels for expenditure and emergency funds still applies

If you don’t want to make asset allocation decision yourself, a good alternative is to invest in a flexible fund, where the manager makes decisions for you, but isn’t constrained by Regulation 28 limits. For Regulation 28 restricted funds managed funds offer a similar solution. Stable Funds offer a more conservative approach whereas Balanced Funds offer a more aggressive solution with more equity exposure.

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