FSB confirms change to Regulation 28

In presenting the budget last week, Finance Minister Malusi Gigaba announced that the the offshore investment allowance for institutional investors would be increased from 25% to 30%. At the same time, the allowance for investments into the rest of Africa would also increase by 5% to 10%.

These changes were immediately confirmed by the South African Reserve Bank (SARB). It issued an exchange control circular on Wednesday confirming that the foreign investment limits had been revised upward.

Effectively this means that asset managers and pension funds can now take a greater portion of their asset pool offshore. Firms like Allan Gray that have had to close their international funds to new investment as they had reached their limits, will therefore be able to open them again.

Co-head of fixed income at Investec Asset Management, Nazmeera Moola, believes that the timing of this announcement was very astute.

“We’ve had 14 months of massive inflows into emerging markets, and while they have become a bit more volatile, the expectation is that there will still be significant inflows this year,” she explains. “If South Africa is embarking on structural reforms it now also becomes one of the most attractive of these emerging markets, so we are likely to see increased inflows, especially into our equity markets.

“In that environment opening up limits for local funds to invest offshore, allows them to diversify, but leans against those inflows a bit and mitigates against rand strength,” Moola explains. “So I think it’s a clever move.”

Regulation 28

The change to the offshore investment allowance also immediately causes a change to Regulation 28 of the Pension Funds Act. This sets the asset allocation limits for individual pension funds.

“From a regulatory perspective, Regulation 28 changes automatically as the offshore limits are linked to whatever the Reserve Bank publishes, unless the Financial Services Board (FSB) prescribes a different percentage,” explains senior policy advisor at the Association for Savings and Investment South Africa (ASISA), Adri Messerschmidt.

The FSB has however confirmed that the new offshore allowances will apply. The regulator’s deputy registrar of pension funds, Olano Makhubela, issued a circular on Friday affirming that pension funds may now “acquire foreign exposure up to the revised limit of 30% in respect of foreign portfolio investments, and an additional 10% in respect of foreign portfolio investments in Africa”.

This will be welcomed by many commentators who have felt that Regulation 28 is forcing investors to be over-exposed to South African-specific risks. However, Messerschmidt points out that a change to the asset allocation limits does not mean that all funds will immediately increase their offshore exposure.

“There are still a number of principles in Regulation 28 about how investments must take place,” she points out. “The requirements like due diligence, risk assessments and asset liability matching are still in effect. Just because the limit has increased, doesn’t mean you can automatically increase your foreign exposure. You have to consider it within those principles.”

Will collective investment schemes follow?

It’s also important for investors to note that although the change to Regulation 28 takes place immediately, this does not affect South African unit trusts. For the moment at least, they are still limited to having 25% of their portfolios invested outside of Africa.

This is because the asset allocation limits for collective investment schemes are set separately through the ASISA fund classification standard. South African portfolios – whether multi-asset or equity funds – must have at least 70% of their assets invested in South Africa, with a maximum of 5% in the rest of Africa and 25% in the rest of the world.

This does create some conflict as many retirement products, particularly retirement annuities, make use of Regulation 28 compliant unit trusts. It therefore makes sense for these funds to have the same asset allocation allowance as pension funds.

Messerschmidt says that ASISA has already called a meeting on Wednesday to look at this.

“There is a mismatch at the moment, so our fund classification standing committee is meeting this week to consider how to update the fund classification standard,” she says.

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