PORTFOLIO POINTERS
By David Crosoer and Professor Prieur du Plessis
THE NATIONAL Treasury has increased the allowance for retirement funds to invest offshore from 30 percent to 45 percent and simultaneously collapsed the 10 percent African allowance.
This is a big change for the asset management industry, which, excluding Africa, had moved its offshore allowance from 15 percent to just 30 percent in the first 25 years of democracy.
What, if anything, does the change in foreign exchange regulations mean for your investment strategy? Surprisingly, in the short term, perhaps not much.
Post the regulatory change, we engaged 14 asset management companies in the multi-asset mandates we make use of, and none intended to increase their foreign exposure in the short term, given their view that valuations still favoured South African assets.
We suspect, though, that in the medium term, the changes are likely to be profound and will result in asset management companies making quite significant changes.
Quite how they will scale their businesses and take full advantage of the wider opportunity set remains to be seen. Certain managers will undoubtedly play to their strengths and stick to a pronounced SA bias through the cycle, while others may favour global fixed interest over global equities, especially at lower risk profiles.
Where managers favour global equities, they will need to convince investors they have an edge, while tactical asset allocation skills may become even harder to implement successfully. As a multi-manager, we have always employed South African and global asset managers, and in addition, we make use of specialist managers.
Here the further relaxation of exchange controls will allow us to implement meaningful changes to our own strategic asset allocation frame- work, which will affect how we access our specialist managers and have significant implications for our clients.
Importantly, compared to before, we will now equal-weight global equities relative to South African equities across all our strategic asset allocations that have inflation targets.
This is a significant change for us and implies our neutral allocation to equities will be split equally between South African and global asset managers across all our specialist mandates. The equal weight between South African and global equities will not remove the home bias to South African equities but will reduce it.
We view the South African equity market as highly concentrated and reducing its weighting in our portfolios relative to foreign equities will help mitigate both stock-specific risk and climate-transition risk over time.
Of course, tactically, we can still overweight South African equities relative to global equities, but our portfolios will generally be better diversified over time. In contrast, our strategic asset allocation to global fixed interest remains low, despite the relaxation of exchange controls, even at lower risk portfolios, where we will continue to significantly favour SA fixed interest over global.
There is no single right answer as to how best to incorporate the new regulations in investment portfolios. Like many South African managers, we currently favour South African equities, but our preference will be tempered by our new strategic asset allocation and the opportunities our global asset managers are finding.
Asset managers themselves are also likely to change their own strategic asset allocations, and each may solve this in different ways, depending on their own internal capabilities and how they wish to enhance return or reduce risk.
As a multi-manager that aims to combine managers to achieve more consistent returns, we are excited about both the greater opportunity set we can now access, especially through our specialist capabilities, and how our SA multi-asset managers will differentiate themselves in playing in this new universe, and also how we can successfully combine them across our portfolios to improve client outcomes.
David Crosoer and Professor Prieur du Plessis are chief investment officer of PPS Investments and chairperson of PPS Multi-Managers respectively; email: [email protected]
BUSINESS REPORT