There is this strange phenomenon in SA called Regulation 28 that is applied to retirement funds. It stipulates that retirement fund members may not have more than 75% of their funds in equities and no more than 25% of the fund invested offshore Continue reading A case for higher offshore weighting within a living annuity?
What if SA is where Zimbabwe was ±20-25 years ago? With the benefit of hindsight, what would the average Zimbabwean do differently? Would they have stopped investing into their pension funds and bought more foreign currency? Would they have emigrated? Would they have bonded their houses to the hilt and taken the funds offshore?
I have always promised my clients that I would not invest their funds where I am not investing myself…if it is good enough for me it is good enough for them. In the same way, I have been a massive proponent of retirement annuities (and pension funds) in SA – they have made so much tax sense (as well as estate duty sense). But what if this is all about to change? If SA goes the way of Zim then I am afraid that your pension fund in SA will be worthless. If the state re-introduces prescribed assets for pension funds, then possibly it will be better to have funds offshore. If Zuma has been paid his commission for the nuclear deal, as some are suggesting, then we are facing a bleak future and a very weak currency – then it will be better to have funds offshore.
They say you should never ask a barber if he thinks you need a haircut and unfortunately this seems to apply to fund managers and pension funds too? If you ask them if it still makes sense to invest into your pension fund in SA they are likely to answer yes – their income depends on it. But what are they doing with their own money? I’ve asked a few of them but no one is prepared to stick their necks out – I suspect that they are all moving as much money offshore as quickly as they can but no one seems to be brave enough to say this in public.
So perhaps it’s time that we had a frank discussion about the future of pension funds in SA – we might not be Zimbabwe yet but perhaps we are the proverbial frog in the pot of water and perhaps we are reaching the point where we will no longer be able to jump out? So how about it, anyone brave enough to express an opinion on this one?
One of the really difficult parts of dealing with people and their money is having to give them bad news about the performance of the funds in which they are invested. They usually react badly and look for all sorts of people to blame (most often this the advisor). Behavioral Finance psychologists tell us that this has something to do with the fact that the pain of loss is about twice as great as the joy experienced from a gain.
The nature of financial advice is such that there will be times when we have to “break the bad news”. Currently this is the case for just about anyone who invested money offshore in the past 10 years…the World Index (in Rand terms) is flat or negative over almost all periods in the last 10 years. And right now, finding anyone who was desperate to get funds out of SA in 2000/2001 is almost like trying to find someone who voted for the National Party during apartheid. What short memories we have and how fickle we are as people. So what lessons could/shoud we learn from this?
Perhaps a good analogy would be to look at the fate of the employees of Enron. It was (and possibly still is) fairly common practise for Americans to invest their pension fund money into the shares of the company for which they work. i.e. Enron employees invested their pension in Enron shares. This makes some sense as there certainly is a vested interest on the part of staff to ensure the success of the company. But there are certain things over which ordinary staff have no control and while things are going fine there is no need for concern. The problem arises when things go wrong…and when they do, ordinary investors are faced with a fundamental “error” when it comes to investing: they failed to diversify!
And so it is with SA – the market has done really well over the past 10 or so years (the ALSI is up around 15% per annum compared to the Global Market index which is marginally negative over the same time). Right now it appears that we should all be investing all of our money into the “company” share in much the same way as Enron employees did. What we fail to remember is that as an investment option, SA represents less than 1% of the total global investment universe. So why would you put 100% of your assets into 1% of the market? The point about diversification is to spread your investment risk and by definition this means that they dont all go up or down at the same time. This has certainly been the case for SA investors who have sent money offshore.
Right now the rand is strong (and getting stronger each day). There are many reasons for this as well as much speculation but one of the most obvious has to do with our interest rates. You can borrow money elsewhere (at almost 0%) and then “invest” it in SA at 6% or more…it is a “no-brainer” as they say. So right now, the rand is strong because people are making money with it. When that no longer applies, we could see ourselves lose favour very quickly and as a result, see the currency weaken very quickly too.
At the same time our share market seems to be fairly resiliant…and the money continues to flow in…fundamentals and politics dont matter… until they matter.
If there is a lesson to be learnt from all of this it is this: right now is an excellent time to be investing outside of SA. Dont wait until it is “too late” and you wished you had done it.
For those wanting to invest offshore (via unit trusts) there are essentially 2 ways:
- Asset swap funds – where the money does not physically leave SA and is always paid out in SA but is effectively exposed to offshore markets. You can do this via a debit order for a few hundred rand each month, or
- Tax clearance and exchange control. The process is a bit tedious and SARS seems to move the goal posts from time to time. But once you have your tax clearance you are free to invest anywhere in the world and this money can even be paid out offshore as well.
Just over 10 years ago when I left the corporate world I put my pension fund into a preservation fund…and the R23000 odd that I invested then is worth about R23000 today…what happened?
One of the important principles in life (and financial planning) is this: each time you make an important decision write down the reasons that you are making it. This will help you years later when you cant remember why on earth you did what you did at the time and what the context of the decision was.
Think back 10 years: it is 2000, we have just come through the Y2K scenario and all of a sudden, the Rand, our beloved currency, started its downward spiral against the US Dollar and UK Sterling. We had never seen anything like this before and almost overnight we went from a respectable exchange rate to what seemed (at the time) like an endless depreciation. At its worst the rand was just under R14/$ and almost R20/Sterling…and at that stage, South Africans could not get money offshore fast enough (the stories of cash going out are the stuff of legend).
And so it was in that context that I decided to invest my preservation fund into 2 offshore funds…Since its worst days, the rand has recovered to just below R5/$ and been back as high as R11/$ and up and down so many times that we have almost lost track of where it currently sits (±R7.3/$). In the ensuing 10 years my preservation fund has been as high as R29000 and as low as R16000…and right now it does not look too clever!
Currently the “consesus” view is that the rand is strong relative to the uS$ and other currencies…surely this would therefore be a good time to take money offshore?
Problem is this: the rand has been strong before and we have taken funds offshore in anticipation of it weakening but it has only confounded (almost) every one and either got or remainded stronger for longer. As a result, right now, harldy any one wants to invest money offshore – we have all been “burnt” by the strong rand!
But that, I think, is a major part of the problem – we have all been taking money offshore for the wrong reasons – fear of a weakening currency and now that this does not appear to be an issue any longer, we cant see reasons to take funds offshore anymore or more importantly, to invest outside of SA.
Consider the following:
- Africa and the Middle East currently still make up less than 1% of the global investable universe. South Africa might have a very first world financial system as well as the largest stock exchange in Africa, but we still dont even make up 1% the total global markets.
- Added to this is the fact that the number of shares on the JSE is shrinking and as a result, the average fund can now only meaningfully invest in somewhere between 50 and 120 shares with some big funds being limited to 20-30 shares at most (this is due to legislation limiting exposure to any 1 share). And this is only going to get smaller as the size of funds grow and as companies either de-list from the JSE and move offshore or de-list altogether.
So there is a big wide world out there and if you were sitting on the moon looking at it (unemotionally) and wondering where to invest your money, you can bet you would not be putting 99-100% of your money into a tiny market at the foot of Africa. So why do we?
I think the reasons are a few fold:
- We were encouraged to invest offshore for the wrong reasons in the first place – fear is usually not a good guide in making decisions about money. We were fearful of an ever depreciating (worthless, Zim-like) currency.
- We were fearful of another failed African State and as a result were happy to take money offshore and “get it away from this place” at almost any cost (again the stories of this are the stuff of legend).
Now that neither of the above has come to pass (and in fact currently look like the opposite has happened) we can no longer see a need to invest elsewhere (and in some circles it is even considered disloyal to take money out of SA).
Bollocks I say. Successful investing is about time, diversification and mostly about the price you pay for your investment. And right now, the rand is strong, SA equities are fairly valued (they are no longer cheap) and developed markets are the out of favour “basket cases”.
Truth is no one knows where the currency is going (it might get a bit stronger in the short term still) but we do know that there are “bargains” to be had elsewhere and an astute investor would consider this exactly the time to be taking money out of SA and investing it elsewhere.
So if I were faced with the same decision about investing my R23000 again, would I still take the funds offshore? Absolutely! But this time the rand is signficantly stronger and as a result the price is better – I cant guarantee it but I am sure that 10 years from now we will wish that we had taken more money offshore in 2010.