Reinvigorate your Retirement Plan

*This content is brought to you by Brenthurst Wealth

By Brian Butchart *

This view is based on our pragmatic assessment of offshore investment opportunities and returns for South African investors and is not a vote of no confidence in what the GNU represents. I believe this is a rare opportunity for a political reset that the country desperately needs, and one that I hope will deliver on the promise of improving the livelihoods of all South Africans.

However, despite our best hopes for a more prosperous country we cannot expect this to happen overnight. Fixing the structural flaws in our economy will, in all-likelihood, take considerable time after years of neglect. And then, don’t underestimate the disruptive power of infighting and politicking as parties vie for influence in the GNU.

It’s also important to recognise that the case for investing abroad is as much about the global economy and the opportunities this presents as it is about our sluggish economy. The S&P 500, for instance, has consistently outperformed the JSE, offering a cumulative outperformance of 1104% in USD or 5607% In Rand  since 1995.

This superior performance is due in part to the S&P 500’s diverse composition, which includes global tech leaders such as Apple, Amazon, Microsoft, and Nvidia, all of which delivered impressive, annualised returns over the past two decades.

The Reg 28 millstone

It is for this reason that we’ve been advocating for more than a decade, that investing offshore is a sensible strategy for any South African saver and will continue to be the bedrock of portfolios that deliver superior returns compared to domestic ones.

As we all know, the local investment landscape is hamstrung by persistent weak economic growth, a shrinking opportunity set with fewer companies on the JSE, and a depreciating currency. Going offshore is therefore a prudent move, but one that is limited if you’re saving for retirement because regulations restrict your offshore exposure.

Regulation 28 of the Pension Funds Act limits registered pension funds and retirement products to a total direct offshore exposure of 45%. The remaining 55% must be allocated locally.

Given the domestic economic challenges, this isn’t a very attractive proposition because slower growth and lower profits have hampered returns.

An obvious remedy to overcoming the limits on your offshore exposure is to invest directly in a discretionary portfolio that gives you access to international stocks. The downside to that is that you no longer qualify for the tax deductions offered by Reg 28 funds.

I’m a strong believer in optimising your tax position by saving the maximum allowable sum of R350,000 a year in Reg 28 funds. If you’re already at this threshold, then a discretionary portfolio overweight in offshore funds could make sense.

Or you could consider options like tax-free accounts if you’re looking for ways to reduce your tax obligations, but Reg 28 funds remain the easiest, tax efficient and simplest structures to use.

How to optimise Reg 28

But what about the 45% offshore limitation, I hear you ask.

A solution that we’re proposing to clients is a cleverly structured fund that is Reg 28 compliant, but effectively gives you far greater than 45% exposure to offshore markets.

For some time now we’ve included the High Street Balanced Prescient Fund in the selection of funds that our advisors are authorised to offer to clients. What makes it so attractive is that it maximises offshore exposure by fully utilising the 45% offshore allowance and then investing 50% + in rand-hedge investments. Effectively giving up to 90% + exposure to offshore markets.

These investments are South African companies that generate most of their income in foreign currencies, such as Bidcorp and Richemont, or dual-listed companies like Glencore and Anheuser-Busch.

Since its inception in December 2018, the fund has delivered an annualised return of 15% versus the benchmark’s 8%. As of 30 April 2024, it ranks third out of 221 in the ASISA South African Multi-Asset High Equity category.

Despite higher headline volatility due to rand-dollar exchange rate fluctuations, the fund’s performance is competitive when measured against rand-denominated global balanced funds, offering lower volatility compared to its offshore peers.

We obviously have many other solutions we offer our clients, but it’s hard to argue against the appeal of the High Street Balanced Prescient Fund considering the restrictive constraints and poorer long-term performance of the average balanced fund.

In an ever-changing landscape, we need to do what we can to prepare for the future. Adopting a strategy that can invigorate returns by smart asset allocation, yet still comply with Reg 28 within your retirement funding is worth considering.

* Brian Butchart, CFP® is the Managing Director for Brenthurst Wealth.