FIRST WORD

Offshore choice

The new Regulation 28 allows pension funds to invest a greater proportion of their assets abroad. Trustees won’t be unpatriotic by taking full advantage.

People have two mindsets. The one decides how they spend the own money on their private pursuits. The other expects somebody else’s money to be spent on the public good; like the poor wanting higher taxes on the rich for wealth redistribution, and the rich contending that it would be counter-productive. Seldom do the two mindsets converge. In practice, they should. Pension funds are a case in point. They’re long-term investors that exist to provide members with optimal retirement benefits. But with the one mindset, individual members raise hell if they suspect that quarter-by-quarter portfolio gains are less than maximised. With the other, as if funds were genetically disconnected from them as individuals, there’d be broad acceptance of the need
for extended time horizons and investment objectives that help promote a domestic environment socially conducive to future prosperity.

Then toss into this mix the “fiduciary” concept and the contradiction is compounded. For pension
funds aren’t something out there. They’re an accumulation of one’s own money with other
people’s.

To be a fiduciary is to look after other people’s money as one’s own. Perhaps more accurately, since there are doubtless fund trustees who don’t look after their own money terribly well, it’s to cherish other peoples’ money as one’s own. With what end in mind?

As if the perpetual tension between funds’ shortterm pressures and long-term needs weren’t enough, now comes potential for further conflict. It’s whether to keep portfolios at home where they can influence investments, or to venture abroad where they can’t. The new Regulation 28, which sets out prudential investment requirements under the Pension Funds Act, puts trustees to a test. Quite aside from the enhanced recognition of socially-responsible investment, the regulation extends the allowance from 15% to 20% (plus 5% into Africa) of a fund’s assets to be invested offshore.

So the question which arises for trustees, as fiduciaries, is whether they push the offshore
allowance to the limit or even whether they use it at all. If they do, they’re diverting SA assets from investment in SA where – with all its infrastructuredevelopment and job-creation priorities – investment is sorely needed. If they don’t, they fall foul of the basic investment principle that portfolio diversification reduces risk.

It might be argued that, without the offshore extension, Regulation 28 provides for sufficient
portfolio diversification across asset classes. On the other hand, the more significant offshore allowance provides greater opportunity to diversify; in other words, to have fewer eggs in one local basket.

With good reason, the offshore policy is sanctioned by government. But it’s for individual funds to implement the policy as they see fit. Some might feel squeamish. Trade unions, for example, can legitimately ask why a chunk of their members’ savings should go to finance infrastructure,
stimulate jobs and buy debt away from SA. The same answers hold for them as for others. The
extent of diversification is their choice. The tradeoff is that there’ll be dividend streams from offshore investment, as there is from domestic investment, into SA pockets.

The freer the outward capital flows, the more receptive SA is seen as a healthy destination for
inward flows representing the foreign investment that SA requires. Conversely, increased outflows not commensurate with increased inflows should lead to a weakening of the rand that several unions (amongst others) consider desirable for domestic industry and exports to become more competitive.

On top of this, trustees need to take a view on the outlook for SA investment itself. Expert
advisors, such as they are, differ from one to the other on whether the charmed run in JSE-listed
equities can perpetuate.

For all the existing positives (consistent economic growth, fiscal strength relative to the US and
European economies, gateway to Africa, status in emerging markets), there could be looming negatives (commodities coming off the boil, the carry-trade reversing on the rand, developed markets regaining favour, long-term government debt financing shortterm consumption) whose outcomes nobody can confidently predict.

In many ways, SA has never had it so good. So warm is the investment climate that the financial
markets have eclipsed the coldness of endemic unemployment, poverty, corruption and the instability they occasion. Socio-political criteria that used to define investor sentiment towards SA are on the scrapheap.

At least for the moment. If two things seem virtually certain, they’re these. First, the good times
can begin to taper; they always do, before the next rebound. Second, the rand is about as strong as it will get; there’s greater latitude for downside than upside. Under even the most basking financial

circumstances, prudence and diversification remain synonymous. There should be no way to fault trustees who opt for the maximum offshore investment that Regulation 28 allows.

Allan Greenblo,
Editorial Director