Institutional investment funds, into which pension funds channel employees’ retirement savings, have, in recent years, increasingly invested offshore.
The Alexforbes 2023 Manager Watch, a survey of retirement fund investment managers released last week, shows that multi-asset funds with a global component have increased their offshore allocation to 34.2%, up from 24.6% in 2018. Allocation to the JSE has fallen in these funds to 38.7%, down from 45.7% in 2018.
Regulation 28 under the Pension Funds Act restricts retirement funds in what they can invest in equities (listed shares) as an asset class. This is to protect employees’ savings from excessive market risk and to ensure diversification. Funds are also restricted in the proportion of their assets that can be invested offshore. In 2022, the offshore limit was raised to 45% of the portfolio value. Previously, the limit was 30% globally with an additional 10% for investments in African markets outside South Africa.
The majority of asset managers in the survey (34 out of 45) were more than 30% invested in foreign assets at the end of last year, while 11 of the 45 exceeded 40%.
Last year’s booming global equity market, particularly the US market, is likely to have been a major factor in managers pushing their offshore exposure further towards the 45% limit in 2023. On the other hand, local equities floundered, managing a comeback only in the fourth quarter.
Coronation, one of the managers surveyed, noted: “After steadily building exposure to global equities during the market sell-off of 2022, the fund entered the 2023 calendar year overweight in growth assets, particularly global equities. This position contributed meaningfully to performance.”
Another asset manager, Aeon, noted: “The fund’s asset allocation and stock selection decision toward global equities was a material contributor to performance. This more than made up for the flat contribution from local equities.”
Looking at allocations to the main asset classes (equities, bonds, listed property and cash), South African listed property has been a shrinking portion of retirement fund portfolios since 2018.
In South African-focused multi-asset funds (those without a global component), exposure to local listed property was 2.83% in 2023, down from 6.4% in 2018. This move away from property has likely been driven by its lacklustre performance since the Covid-19 crisis in 2020.
Exposure to bonds in SA-focused funds rose in 2023, making up 25.2% of SA-focused multi-asset portfolios, up from 19.2% in 2018.
Industry trends
The Alexforbes report highlighted a number of trends and developments in the institutional investment industry, including the following:
• Assets under management (AUM). As of June 30, 2023, Ninety One Asset Managers was the largest asset manager, with a 6% increase in assets (to R823 billion, of which R491bn is invested in South Africa). Stanlib retained second place with a 6% increase (to R649bn; R565bn in SA). Coronation moved to third place with an 8% increase (to R563bn; R397bn in SA), surpassing Sanlam Investment Management. Alexforbes Investments ranks as the top multi-manager in South Africa.
• Black economic empowerment (BEE). The report notes: “The asset distribution in 2023 is significantly concentrated among Level 1 contributors. In 2022 the distribution among Level 1 and 2 contributors was 92% and 2% respectively. Continuing the trend that asset managers are transforming and taking BEE seriously, the distribution among Level 1 and 2 contributors for 2023 was 91% and 5% respectively. Looking at the total assets under management of the top five black-owned asset managers in the June 2023 AUM survey, we saw growth of 43% compared with the position of this group of participants in the June 2022 survey. For the first time, we had four participants of the BEE survey in the top 10 of the AUM survey.”
• Environmental, social and governance (ESG) considerations. In 2023, the uptake of responsible investing principles increased – 69 asset managers endorsed the Code for Responsible Investing in South Africa, compared with 62 in 2022. Additionally, 59 asset managers had signed up for Principles for Responsible Investment (a UN-supported global network), compared with 48 in 2022. “This growth underscores a continuing trend towards the integration of ESG factors into investment and business decisions, highlighting an enhanced commitment to sustainability within the investment industry,” the report says.
• Standardisation of fee structures. “In 2021 and 2022, most asset managers transitioned from reporting separate fees for domestic and international assets within their global balanced funds to providing a single total fee for these portfolios. This trend continued into 2023, complicating fee comparisons across years. Managers were asked to standardise fees using a sliding scale framework based on distinct AUM bands, further enhancing fee transparency and comparability,” the Alexforbes report says.
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