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?
I found myself facing a crisis recently. I have always promised clients that I would only invest their funds where I myself am prepared to invest for myself and my family and yet with the recent shenanigans from our president who saw fit to remove the finance minister, I found myself at a cross roads. From my very simplistic point of view, South Africa is facing one of two future outcomes:
- We are either at the point where Zimbabwe was 20-25 years ago, or
- We are facing a short-to-medium term of economic pain (5+ years) from which we will ultimately emerge.
The crisis for me is that if I believe that we are a future Zimbabwe then it requires action now, 10 years’ time will be too late. At the very least it would require financial emigration which would involve selling our house, taking the capital offshore and then renting. On top of that it would mean no longer contributing to retirement funds in SA. That’s a radical departure and advice of that nature could be considered reckless at the least. But it would be what I am doing and it would require telling my clients about the path of action that I have taken.
On the other hand, if I believe that our crisis is going to be short-to-medium term but that we will ultimately emerge then we can stay in SA, keep the house and still continue to make use of retirement funds here. That does not mean to say that regulations around retirement funds wont change (think prescribed assets and the withdrawing of asset swap facilities). If that happens then we adjust at that stage, but for now we continue. In addition to continuing to contribute to retirement funds in SA, it makes sense (from more than a fear point of view) to continue to invest discretionary funds outside of SA via the annual discretionary allowance. It’s a big wide world out there and if you sat on the moon and looked at the earth as an investment destination, you would not put 99% of your money into the very small economy at the tip of Africa. Diversify!
So with these two scenarios in mind I went looking for some answers. The problem is that there are few people who you can ask and who will give an honest answer. There are too many conflicts of interest. Pension fund managers’ incomes are a function of people investing in their products, so too for asset managers and there are few economists who are prepared to be quoted as saying that SA is a complete basket case and that it’s time to get out before it is too late. Yes, there are some “journalists” and commentators who have written about the doom filled future but their articles are too sensationalist, emotive and lacking in substance for me.
I finally managed to have a few off the record chats with some asset managers and strategists and last week I resolved the issue for myself.
I truly believe that we will emerge from the crisis that we are facing as a country. It’s going to be tough in the short term, even if Zuma is removed. There is still a lot that is rotten in Government and our State-Owned Enterprises and this is not going to change overnight. We are also facing an increasingly divided society with yet another generation of poorly educated youth. These are significant challenges that face us.
But there are brave, principled people who are finally starting to take a stand against the blatant and unashamed looting of state resources and our country. These are the future leaders of this beautiful land and this is one of the reasons that I have hope and am not selling my house. I will contribute to my pension fund this year and I will continue to diversify any surplus investments offshore. I also commit myself to building a fairer, less divided country for all. For now, “normal” service has resumed.
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?
There are essentially 2 emotions that drive human behaviour when it comes to money: fear and greed. Both of them can result in investors behaving irrationally and this can result is significant financial losses if we are not careful.
For many South Africans there is currently a lot of fear around the future – it certainly looks like SA Inc is doomed (well for the next 5-10 years at least) and at times like this it is easy to panic and want to sell the house and take all the proceeds offshore. However, while having funds offshore may make you feel better about things, it might not be the correct thing to do financially.
Investing requires time – but investing offshore requires even more time. This is because you not only subject yourself to the volatility of the markets but also the volatility of the currency. It is possible that you get a double negative on your money – weak offshore markets and a stronger rand at the same time.
If you don’t think this is possible, ask anyone who took funds offshore during the first 3 months of 2016 – we hit almost R17/US$ (we are currently under R14/$) and we touched R24/GBP (R17.1/GBP currently). Those are significant short term losses as a result of currency movements*.
The point is this – take money offshore by all means but make sure that:
• You have a plan in place for investing and that this forms part of your long-term plan.
• You don’t need the funds for at least the next 10+ years and possibly longer.
• You don’t need to draw income from the funds at any stage.
• You don’t leave it sitting in a bank account offshore.
• Don’t put it into an insurance backed product – use unit trusts and ETF’s as far as is possible.
• It is also probably not a good idea to borrow money to take it offshore – there is a very real chance that interest rates could go up by a few % points over the next few years which might make the repayments on the loan impossible. If this corresponds to a period of currency strength and market weakness, you could end up in a real cash-flow crisis
*for anyone who can remember back to 2001/2 – the rand almost hit R14/$ and then fell right back to around R5/$ over the next few years.
I have written about this before but the issue has come to the fore again when I recently applied for a tax clearance certificate for offshore investing on behalf of a client.
On the face of it, exchange control legislation has all but fallen away with the announcement by National Treasury that individual investors can take R4million offshore each year. But it seems that someone at Treasury forgot to tell SARS that it is ok for people to take money offshore.
In my experience, it is just about impossible to get a tax clearance from SARS at the moment. The number of hoops that need to be jumped through seem to change quite regularly, they lose the application form, they have different “standard” processing times and then tend to decline the certificate on minor technicalities (it seems that at this stage SARS require a prospective investor to have the amount they intend investing actually sitting in their bank account).
So while exchange controls might officially have been relaxed by National Treasury it seems that another government department is making it almost impossible to get official permission to take the money offshore. The result of this is that people will eventually give up on the the “right thing” and will find other ways to take money offshore again. But is that not the reason we needed a whole big amnesty a while back?
Surely someone at Treasury needs to speak to someone at SARS and find out why they are being so difficult with the tax clearance process? The result of SARS’ approach will be increased non-compliance in the future (especially if we see the rand weaken again suddenly).
I remember, as a kid, reading about Doctor Dolittle and the fantastic “pushmi-pullyu” a gazelle-unicorn cross with two heads (one of each) at opposite ends of its body. Whenever it tried to move, both heads went in opposite directions and as a result it went nowhere.
I had to apply for a tax clearance for foreign investment for a client of mine and could not help but think how the current tax clearance process reminded me of the mythical animal. On the one head Pravin Gordhan has announced significant relaxation to exchange controls which should make it easier for South Africans to invest offshore. On the other head, however, is SARS – seems that no one has informed them of the intention to allow South Africans to invest offshore more freely. The whole tax clearance application process is far too complicated, time consuming and inconsistent. It seems as if they are intent on making it as difficult as is possible and so it would appear that SARS is pulling in the opposite direction from Treasury.
We eventually got the certificate but after quite a bit of time (more than 3 weeks) quite a few phone calls and 2 visits to the SARS branch…and this during a time when hardly anyone wants to invest offshore.
It is an excellent time to take money offshore – but don’t expect to do it in a hurry if you don’t have tax clearance and so my advice is that if you think you might be investing sometime in the next year, apply for tax clearance. The certificate is valid for 12 months and you don’t have to use it immediately. Don’t wait for the rand to weaken and try to apply in the rush – it will be too late!
Mostly, I love what I do – helping people to manage their money better. Yesterday I was reminded again of the value that we can add to people’s lives…
A client called me about a forex transaction that she was busy with to see if I thought the rate that the bank was offering her was a fair one. A quick glance at the spot rates told me that they were offering her a rate that was 2% more than the spot rate…I told her that I thought it was too high, especially seeing as they were also going to charge her a fee for doing the transaction. I told her that she should ask them for a better rate. There was always the chance that they would decline it but if she did not ask she would not know.
She duly went back to the bank and asked them for a better rate…after consulting with their treasury department they told her that instead of R11.25 to the Sterling they could offer her R11.18…she accepted but was tempted to ask them if that was their final offer or if she asked again would they give her an even better rate.
Now this might not seem like a big deal but on R1million rand it amounts to a saving of just over R6600. Now in anyone’s language, that’s a lot of money…what really bugs me is if the bank could offer her this rate why did they not offer it upfront? And if she had not asked us about the transaction she would have been none the wiser…
So just how badly are the banks milking us and do they expect their clients to barter for rates hoping that there are enough “little old ladies” who dont know any better where they can make significant profits?
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.