A Solution to Take Retirement Savings Beyond South Africa
Regulation 28 of the Pension Funds Acti (“Regulation 28”), while designed to manage concentration risk within retirement portfolios, also places constraints on South African investors’ exposure to international markets.
The current limit of a 45% direct offshore allowance means that 55% of investors’ retirement savings must be allocated locally, despite the JSE All-Share Index (“JSE”) accounting for less than 1% of the global equity market.
Stagnant economic growth has hindered local market returns over the past decade resulting in Regulation 28 compliant funds underperforming their global peers.
However, boutique managers with access to a larger investible local universe have been able to mitigate the difficulties of the local economy by investing in select Rand-hedge opportunities.
Locally, a concentrated investible universe has constrained larger funds to focus on the biggest 40 companies which account for approximately 85% of the JSE.
Boutique asset managers, such as High Street Asset Management (“High Street”), have the benefit of accessing a larger investible universe which includes Rand-hedge opportunities in both the local equity, and more importantly, the locally listed property markets.
Boutiques can invest in the latter opportunity set, while being able to exit positions within a week versus large funds which could take over 2 years.
Essentially, most Rand-hedge property shares are uninvestable for larger funds owing to liquidity constraints.
GDP growth is the primary determinant of earnings growth over the long-term.
These earnings, coupled with the subsequent dividends paid to investors, are responsible for the majority of shareholder returns.
The valuation that a share or market trades on becomes less relevant the longer the performance measurement period.
Ultimately, the economic growth of the regions in which a company operates becomes the primary factor in determining shareholder returns.
South Africa’s GDP growth, and subsequently market returns when measured in the same currency, have been roughly in line with the United States over the past two decades, although it has been a tale of two halves.
From 2003-2013, SA GDP grew at 3.4% per annum, which is a commendable achievement by international standards. This led to earnings-per-share growth of 19% per year for the JSE.
Yet, over the last decade, GDP growth slowed to 0.6% per annum, which saw earnings-per-share growing marginally above inflation at 7% per annum.
If one were to remove the Rand-hedge contributions from this figure, it would be considerably lower.
The High Street Balanced Prescient Fund (the “Fund”) aims to always maximise offshore exposure and mitigate local risks whilst remaining within the constraints of Regulation 28.
This dual objective is achieved by fully utilising the 45% offshore allowance and investing in Rand-hedge investments with the remaining 55% mandatory local component.
An important distinction is drawn between the two types of Rand-hedges.
Internal and external Rand-hedges both generate returns in non-Rand currency; however, external Rand-hedges (such as Bidcorp and BHP Group) have limited operational exposure to South Africa when compared to internal Rand-hedges (like Kumba Iron Ore and Amplats).
Over the past decade, external Rand-hedges have significantly outperformed which highlights the importance of considering where these companies operate, as well as the currencies in which the revenue is generated.
Since the Fund’s inception in December of 2018, it has produced an annualised return of 13.83% vs the benchmarkii of 9.14%.
As of 18 June 2024, it is ranked 1st of 224 over 5 years within the ASISA South African – Multi-Asset – High Equity categoryiii.
In bouts of economic uncertainty and Rand weakness, the Fund has generated significant alpha given its mandate.
Notably, the Fund’s 5-year track record was achieved over a period when the Rand depreciated by less than its long-term average against the US Dollar, suggesting that performance is not solely reliant on a weak Rand.
More importantly, the strong economies in which the Fund’s underlying investments operate was the primary determinant of returns.
While the exchange rate fluctuations will continue to be a factor driving returns, High Street suggests that investors should prioritise where they foresee greater GDP growth potential when making investment decisions.
This high-conviction Fund, benchmarked against a global standard, stands out as a differentiated option for retirement savers.
By employing a concentrated approach focused on international or Rand-hedge revenue streams, it offers diversification beyond a traditional model portfolio and low correlation to typical Regulation 28 compliant funds.
It is available directly through Prescient Fund Services or on most major platforms.
To learn more and visit High Street click here.
High Street Asset Management (Pty) Ltd is an authorised financial services provider in terms of the Financial Advisory and Intermediary Services Act, 37 of 2002 with FSP number 45210.
Disclaimer: See full disclaimer: www.hsam.co.za.
Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CISs are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Performance has been calculated using net NAV to NAV numbers with income reinvested. There is no guarantee in respect of capital or returns in a portfolio. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information such as fund prices, fees, brochures, minimum disclosure documents and application forms please go to www.prescient.co.za.
Sources
All figures stated above were extracted by High Street Asset Management from Bloomberg on 18 June 2024, with exception to the below.
i Pension Funds Act 24 of 1956
ii Benchmark (ASISA South African – Multi-Asset – High Equity category); data captured on 18 June 2024.
iii Funds Data Online (30/04/2024)
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