Malungelo Zilimbola, founder and CEO of Mazi Asset Management, said recent changes to Regulation 28 could result in South Africa’s asset management industry experiencing an outflow of R1.5 trillion.
Regulation 28 of the Pension Funds Act (PFA) stipulates how much exposure to foreign assets is allowed in retirement funds and related investment schemes.
Amendments to Regulation 28 increase the maximum offshore exposure for retirement funds from 30% to 45%.
Many investors welcomed the change, saying it adds flexibility to fund managers and will create better balanced funds.
They explained that having higher offshore exposure can assist them in meeting the investment mandates of their clients.
Other benefits include integrating the global element with local portfolios, including meeting environmental, social, and governance (ESG) guidelines.
Having more access to global assets is also beneficial from a risk perspective as it enables fund managers to compensate for the shortcomings of the limited local market.
However, Zilimbola described the Regulation 28 amendments, which will become effective on 3 January 2023, as a “drastic move” with a big impact on local funds.
“If you take our industry as being R10 trillion, and you allocate an extra 15% offshore, it gets to R1.5 trillion that will move from local asset management industry to global managers,” he said.
“It is going to affect many portfolios, bring about a lot of performance divergence, and introduce currency risk.”
He explained that should the rand strengthen, many South African portfolios with great offshore exposure will lose a lot of money.
The Regulation 28 amendments will also significantly impact the South African asset management industry.
“South African asset managers are not able to manage this vast amount of capital which will move offshore, and you have to bring in foreign asset managers,” Zilimbola said.
“The impact will be a loss of assets by local asset managers to global asset managers. It will cause the local industry to lose skills and sink.”
He expects local asset managers to partner with global managers to provide a full suite of services and capabilities to properly manage offshore funds.