Pension funds should go more foreign
Foreign exchange controls will be relaxed, not scrapped. This is likely to happen through a phased approach over the next five to 10 years and South African retirement funds will be given the opportunity to invest 25-30% offshore.
This is the expectation at Investec, said Head of Institutional Sales, Natalie Phillips. She was speaking at the winter conference of the Principal Officers Association (POA) near Johannesburg this week.
When the easing indeed happens, she does not expect South Africans to "take to the hills". There would be no capital flight, she predicted. Even in countries where there is minimal exchange control, a home-based bias exists, with investments staying in the country of origin.
What is not recognised often enough is that in many other countries, like Switzerland, Australia and Canada, there is also some form of foreign exchange control. For example, in the case of Australia, they have taxation on foreign income.
For the SA retirement fund industry, the possibility of diversifying exposure to other markets they developed or into African markets is becoming increasingly important, she told the audience, which consisted mostly of principal officers and trustees of pension funds.
The SA equity market is unlikely to continue to deliver the stellar returns of the past four years, and with the number of delistings occurring as a result of private equity deals, the investable universe in South Africa is shrinking.
SA bonds are no longer as attractive and hedge funds and private equity are still in their infancy. As a result, it will be increasingly important for South African retirement funds to look beyond South Africas borders for currency and country diversification as well as alternative sources of return for members.
The amount of choice of investment opportunities internationally are particularly attractive where allocations to private equity, hedge funds and direct investment in commodities have taken place for over a decade in these markets.
Phillips also highlighted the benefits of investing in Africa listed equities and private equity which is receiving increasing interest by foreigners. She also urged her listeners not to forget that an additional 5% can be invested in Africa for SA retirement funds over and above their current 15% offshore allowance
Phillips warned that the South African equity market is no longer as cheap as it was four years ago and that the PEs of the SA equity market relative to other developed equity markets such as the US have converged.
In a resource-biased economy, like South Africa, there is also more volatility of the equity market and investment in other markets for South African retirements funds will offer further diversification. This is similar to what happened in Australia post their retirement fund reform.
"International has been off the agenda for too long," said Phillips. "We must bring it back".
During a panel discussion at the end of the conference, the NUM's Jeff Magida, warned pension funds to transform. Procurement policies should reflect the need to grow emerging service providers.
The NUM is active in its pension fund administration but all trade unions should go this route, Magida said.
