Regulation 28 changes

During his annual Budget Speech on 23 February 2022, the Minister of Finance announced an increase in the offshore allocation limits for pension funds.

What are the changes?

A Regulation 28 compliant portfolio will now be allowed to have an aggregate exposure to foreign assets up to a maximum of 45%. Therefore, the previous prudential limits of 30% offshore ex-Africa and 40% in total, including the African allowance of 10%, have now been combined into a single limit of 45%.

How to interpret the change in foreign exposure limits?

Simply put this means that there is now just one prudential limit for South African institutional investors of 45% exposure to foreign assets.  It is therefore theoretically possible to comprise the foreign exposure of an institutional investor entirely of African or non-African assets.

The split between foreign portfolio investment allowance and additional Africa exposure has therefore fallen away for investment purposes. It is important to note however, that reporting to SARS will still require the split to be made.

When does this change come into effect?

The change was published on 25 February 2022 and thereafter backdated to 23 February 2022. Thus, the change became effective immediately. ASISA has also issued an exemption which will allow South African portfolios to invest up to 45% of their assets in foreign markets. The ASISA fund classification for South African portfolios will now read:

“South African portfolios: These are collective investment portfolios that invest at least 55% of their assets in South African investment markets. This exemption is effective immediately and is subjected to supplemental deeds allowing for such a change.  Unless the supplemental deed specifically states the percentage limit for offshore assets as 30%, any South African portfolio may now hold up to 45% in foreign markets. “

To understand what this could practically mean for funds and investment decisions going forward, we asked Adam Bulkin, head of Manager Research at Sanlam Investments Multi-Manager for some insight.

“For any mandate, be it equity, multi-asset or otherwise, the increase of the potential allocation to offshore assets has important consequences. As the potential range of allocation increases, the variability of returns naturally becomes greater, particularly as foreign exchange moves in relation to the rand are volatile and potentially great in magnitude. Added to this is the variability of returns within asset classes, such as offshore equities and bonds, driven by factors such as styles, sectors and regions.

The result is that a manager’s allocation capability with respect to offshore versus domestic assets becomes an even more important consideration in assessing that manager’s skill, as does the manager’s instrument selection within the pertinent offshore asset classes.

We believe that this increase in the allowable offshore exposure means that there are more degrees of freedom and choices available. For us, this means that managers must take more intentional, explicit and active decisions in their offshore allocation.

As an investment team we surmise that this will introduce greater variability of returns both broadly within funds in general, but also within peer groups. It is likely that many managers may increase their strategic allocation offshore in somewhat of a static manner (meaning they will structurally increase their offshore exposure). This could imply, as alluded to above, more volatility as foreign exchange rates are magnified, but also that those managers who are more active in their offshore versus domestic calls will have the potential to increase their out- or under-performance depending on the success of their positions. Moreover, those managers with domestic-only mandates within a particular peer group will also have more markedly different performance from those who have offshore allocation.”

In light of the changes and the impact that they could have on underlying funds and the portfolios that we construct, we are reviewing our strategic asset allocations. If there are any changes made, we will communicate them to you in due course.

Should you have any questions or need further details, please do not hesitate to contact your account executive.