AfricaIn a new series in conjunction with Investec Asset Management, Funds Global MENA looks at the opportunities affecting fund distributors around the world. Mark Jurgens, founder of Jurgens Group, explains that political instability and a loosening of financial regulation have combined to boost South African investors’ demand for funds that invest offshore.

Fifteen years ago, capital controls ensured South Africans invested relatively little of their wealth overseas. But in the last few years, South Africa’s financial regulator has relaxed the controls.

Mark Jurgens, founder of Jurgens Group, a Johannesburg-based investment and risk manager, says that for most of his clients, “the exchange control limits have almost completely disappeared”. The results are rising outflows from South Africa into funds invested offshore, especially multi-asset managed funds.

Changing regulation is not the only reason South African investors are investing abroad. Many investors are concerned that the Johannesburg Stock Exchange is too expensive and fear a correction in the near future. Others are unhappy with the country’s power grid failures and relatively poor economic performance and have highlighted the administration of President Jacob Zuma. For these investors, money invested abroad is considered safer than money invested locally.

“We have had some political instability under our current president,” says Jurgens. “Power outages are causing problems in the economy, unemployment is a little high and investors are not totally optimistic about investment returns on our local stock market, which has run pretty hard and is unsustainable at this time.”

In this climate, it is not surprising that many investors have sought to invest in funds denominated in hard currencies such as the dollar or the pound instead of the South African rand. However, investors have found the depreciation of the rand has often outpaced their investment returns. Jurgens says it is not unusual for an investment in a sterling-denominated UK cautious mutual fund to yield about 3-4% a year in investment returns and a further 9% thanks to the depreciation of the rand. The combined return far exceeds even the relatively high interest rate that South African investors receive on their bank deposits.

When South African investors select investments offshore, they are aided by their country’s regulator. The Financial Services Board (FSB) provides a list of approved funds that invest offshore, thereby monitoring funds they believe are competitively run by reputable firms. Asset managers naturally strive to obtain the FSB’s approval, though sophisticated investors, notably among the high-net-worth segment, are happy to invest in unapproved funds if they feel the investment case is attractive.

What kinds of funds are South African investors choosing? “Multi-asset funds are a popular type,” Jurgens explains. “Investors are moving their money out of what they view as an overvalued South African equity asset class fund. The risk would then be spread across the different asset classes, perhaps with derivative exposure to lower the volatility. With that said, investors do tend to want a large exposure to equities within the multi-asset range of funds due to a higher return. Particularly in the last three years, there has been an increase in offshore investments for longer terms.”

The task of monitoring offshore funds is only one of the duties of the FSB. Major changes underway in South Africa include the implementation of a retail distribution review (RDR), similar to what was developed in the UK.

“The FSB identified areas where the average retail client is not receiving fair value from a cost point of view,” says Jurgens. “The FSB released a paper with 55 proposals, aimed at financial advisers, agents, insurance companies, stock brokers and unit trust managers. Jurgens Group welcome the change as it will only benefit the retail client and the man in the street.”

“Due to Jurgens Group’s competitive fee structures,” he adds, “we feel there will not be major implications to our revenue going forward.”

Could anything stop the trend for South African investors to buy funds that invest offshore? One factor is the currency. If the rand reverses its position relative to the major world currencies, many South African investors would stand to lose on their overseas investments.

“As an individual investor, having sent money overseas at 12 rand to the US dollar, I would stand to make a negative return if the rand strengthens to 10,” says Jurgens. “However, the positive sentiment that would come with that would make us more positive in terms of an improving economy.”

To explain this point, Jurgens says he would welcome a stronger rand because it could imply a turnaround in the country’s political and economic situation.

“We don’t expect to see the currency turning around in the next six months,” Jurgens says. “But I do believe that when we see progress in the economy, unemployment and corruption, people will view South Africa in a more positive light going forward”

An improvement in South Africa’s domestic economy may cause investments previously invested offshore to be reinvested in South Africa. However, if Jurgens is right, this will only be in the future.

©2015 funds global mena

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