Offshore Exposure Limits In February 2022, the offshore limit of Regulation 28 (Reg 28) was revised and simplified by Minister of Finance Enoch Godongwana .
Previously, the limit was 30%, but managers can also have African exposure beyond the existing limit abroad of 30%.
However, most managers have little exposure to Africa. Now it’s much simpler. Globally, regulators can have up to 45% of foreign exposure, but Africa still has a 10% limit.
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This amendment applies to retirement products. Life annuities are not subject to Policy 28 because they are an insurance product. Nor does it apply to so-called binding investment, or what we sometimes call discretionary saving.
Previous Changes to Regulation 28 limited
There was an initial 15% offshore allocation. But over time, Regulation 28 allowances have increased to allow for more exposure abroad.
As a result, asset managers have moved closer to the 30% cap we had before February 2022. We expect outbound exposure to start increasing again for gender new 45% limit.
The asset class that is likely to underweight is domestic stocks, this is a trend we have seen in the past.
In terms of change, this is absolutely positive for investors. This costs the investors nothing and essentially gives people more options and takes more time.
We don’t think we need more than 45% exposure abroad. Whether the limit is 45% or 100%, foreign exposure will peak at around 40%.
With more options for strategy building, the result will be a more efficient portfolio, more freedom of movement, a more diversified perspective, and ultimately, good risk-adjusted returns. for the entire industry.
Generous limits are good and good, but not without its challenges. One of the obstacles to investing abroad is that we invest in foreign currencies, such as US dollars, but the return is in rand.
The value of the Rand per US dollar provides additional volatility for overseas asset classes.
Thus, if we expose uncorrected, 45% tends to be too much. If one can profitably hedge some foreign exposure, almost all investors should invest 45% abroad.
For context, our optimization results indicate that our outbound exposure, for 6% plus inflation strategies, will likely increase from 30% to 40%.
In more conservative commodities, overseas shipments will only increase a few percentage points.
Valuation
The key message is that we intend to increase our foreign exposure, especially for our equity-intensive balancing strategies.
However, the Rand has weakened considerably, and offshore Rand is not an attractive level.
In terms of stock valuation, we look at South African stocks, global non-US stocks and US stocks to quickly gauge their relative attractiveness.
We see global equities outside the US hovering around fair value or just below. The US market is relatively expensive. Therefore, from an equity perspective, now is not a good time to rush.
When it comes to global bonds, South African government bonds offer very attractive yields, especially compared to developed market bonds.
Again, this is not a good time to sell locally and buy abroad.
In short
No matter how far we want to go, an opportunity presents itself without signaling that we have to rush and do it tomorrow.
In all likelihood, we will most likely move overseas in incremental steps and look for the right timing when there are global sales or local market rallies
