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Are you taking full advantage of the new offshore exposure limit in line with the most recent amendment to Regulation 28?

What are retirement funds?

Retirement funds include Pension Funds, Provident Funds, Pension Preservation Funds, Provident Preservation Funds, and Retirement Annuities.

What is Regulation 28?

Regulation 28, issued in terms of section 36(1)(bB) of the Pension Funds Act, protects retirement fund member savings by limiting the extent to which these funds may invest in a particular asset or in particular asset classes, and prevents excessive concentration risk. Concentration risk is the potential for loss in value of a fund when exposures move together in an unfavorable direction.

What is the new offshore exposure limit?

Following the 2022 Budget Speech by Finance Minister, Enoch Godongwana, on the 23rd of February 2022, the South African Reserve Bank (SARB) issued Exchange Control Circular No. 10/2022 introducing a new total foreign exposure limit for retirement funds of 45%. Previously, investors were limited to 30% foreign exposure (ex. Africa), with an additional 10% allowed for investments in the rest of Africa (ex. South Africa), bringing the total foreign exposure limit to 40%. The new limit of 45% allows investors to increase the offshore exposure of their retirement funds without dictating a split between investments domiciled in Africa (ex. South Africa) and the rest of the world.

What does that mean for you?

As an investor of a retirement fund, with an increased offshore allocation, you are afforded a more diversified and global approach to saving for retirement.

Why should you diversify and invest globally?

Firstly, it is important to note that South Africa represents a mere 0.4% of the global opportunity set. This means that 99.6% of investment opportunities are domiciled ex. South Africa; a proportion which one could argue is too large to ignore.

Secondly, it should come as no surprise that the global GDP continually outstrips South African GDP by a hefty margin over the long-term. Over the past 10 years, South Africa’s GDP has underperformed the global GDP by 48%, the United States’ GDP by 60%, and China’s GDP by a staggering 162%.

In the same breadth, South African securities have underperformed, and continue to underperform peers over time. Since 1994, in United States Dollars, the South African listed equity index, the JSE All Share index, has underperformed the global FTSE All-World index by 132%, the Chinese Shanghai Composite index by 410%, and the United States S&P500 by 472%.

Finally, hard currencies are a greater store of value over the long-term. Emerging market currencies, such as the Rand, in general, are subject to higher inflation than developed markets globally. These inflation differentials with the developed world lead emerging market currencies to depreciate relative to hard currencies over time. Since 1980, the Rand has depreciated 1,868% against the United States Dollar.

Investing in a portfolio that is diversified not just across asset classes, but also globally, improves risk-adjusted returns by exposing your portfolio to more opportunities and reducing the concentration risk in one particular geographic market and asset class.

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