SOME asset managers are turning away money
destined for rand-denominated offshore funds after the currency’s
weakness resulted in breaches of maximum portfolio allocation rules.
The
rand plunged 45.15% against the dollar in the year to January 26 as
emerging markets experienced sharp capital flight. This has seen certain
portfolios exceed their allowed foreign retail asset allocations that
exchange controls cap at 25% for retirement funds and long-term
insurers.
The controls allow an additional 5% to be invested in African assets, while collective investment schemes may invest up to 35% in foreign assets.
The exchange controls were introduced in an effort to preserve foreign currency reserves.
"The weakness of the rand has meant that our offshore investments have grown disproportionately in rand terms," says Richard Carter, head of product development at Allan Gray.
"To make sure we do not exceed the limits, our Allan-Gray Orbis rand-denominated unit trusts have been closed to new discretionary investment for over a year," says Mr Carter.
It has been easy to exceed the limits and many local fund managers are "fairly close to the limit", says Zulfa Abdurahman, Old Mutual Investment Group’s head of legal and compliance.
"Naturally, with the recent weakening of the rand, it was inevitable that the foreign exposure limits would be exceeded as a result of market movements and, in our case, certainly not as a result of discretionary trading."
Louis Niemand, investment director at Investec Asset Management, indicates that this is not a unique occurrence.
"Portfolios with an offshore allocation are naturally susceptible to currency and price movements, which sometimes result in portfolios exceeding the exchange control limits," he says.
The Reserve Bank’s exchange control manual allows institutional investors to report reasons for the excess in their quarterly reporting, and the steps they will take to bring the allocation back within the legislated limits.
SA’s exchange control regulations are not new. They first came into force in December 1961, with authorised dealers in foreign exchange provided with exchange control manuals in 1990.
In a high-profile case, billionaire businessman Mark Shuttleworth instituted legal action to recover R250m in "exit charges" levied by the Reserve Bank under the exchange control regulations. The action reached the Constitutional Court last year.
The Bank argued that the regulations are aimed at curbing capital flight. This defensive position has helped to protect the country’s external reserves, which are among the highest of the largest economies in sub-Saharan Africa. By December, SA’s reserves were worth $40.65bn, a decline of 3.45% in the course of the year.
Compared with rival Nigeria, SA has done quite well. The West African country experienced a 13.07% decline in its reserves in the year, despite central bank governor Godwin Emefiele’s introduction of capital controls in December 2014.
Nigerian reserves declined to $29.1bn from $37.3bn during the year to June 2015.
Data show that the Central Bank of Nigeria’s reserves were wiped out on 19 January last year. Mr Emefiele blamed this on the plunge in oil prices — on which the oil-rich country is heavily dependent — and "speculative foreign exchange activities". In August, he introduced a ban on foreign currency cash deposits into Nigerian banks, only allowing wire transfers into foreign currency accounts.
Angola, similarly dependent on oil exports, saw a sharp 28.79% decline to $25.1bn in gross reserves between September 2013 and last December.
The Banco Nacional de Angola, its central bank, has imposed restrictive foreign exchange measures in response to the depreciation in the oil price.
For those institutional investors who have fallen foul of the Reserve Bank’s exchange regulations, there is a 12-month deadline to fix it without any punishment from the Bank.
"By allowing a time frame of 12 months to correct the contravention, the Bank aims to ensure that institutional investors have a reasonable amount of time to get back to the required asset limits without placing retirement fund savings at a disadvantage," says Mr Niemand.
Offshore portfolios may not add to their allocations during this 12-month period.
Ms Abdurahman says institutional clients may apply for an exemption from the exchange control regulations if it were in their clients’ interests to keep their offshore investments longer than 12 months.
"Fund managers would need to approach their pension fund clients for an instruction and to possibly encourage and assist those clients in applying for an exemption," she says.
The controls allow an additional 5% to be invested in African assets, while collective investment schemes may invest up to 35% in foreign assets.
The exchange controls were introduced in an effort to preserve foreign currency reserves.
"The weakness of the rand has meant that our offshore investments have grown disproportionately in rand terms," says Richard Carter, head of product development at Allan Gray.
"To make sure we do not exceed the limits, our Allan-Gray Orbis rand-denominated unit trusts have been closed to new discretionary investment for over a year," says Mr Carter.
It has been easy to exceed the limits and many local fund managers are "fairly close to the limit", says Zulfa Abdurahman, Old Mutual Investment Group’s head of legal and compliance.
"Naturally, with the recent weakening of the rand, it was inevitable that the foreign exposure limits would be exceeded as a result of market movements and, in our case, certainly not as a result of discretionary trading."
Louis Niemand, investment director at Investec Asset Management, indicates that this is not a unique occurrence.
"Portfolios with an offshore allocation are naturally susceptible to currency and price movements, which sometimes result in portfolios exceeding the exchange control limits," he says.
The Reserve Bank’s exchange control manual allows institutional investors to report reasons for the excess in their quarterly reporting, and the steps they will take to bring the allocation back within the legislated limits.
SA’s exchange control regulations are not new. They first came into force in December 1961, with authorised dealers in foreign exchange provided with exchange control manuals in 1990.
In a high-profile case, billionaire businessman Mark Shuttleworth instituted legal action to recover R250m in "exit charges" levied by the Reserve Bank under the exchange control regulations. The action reached the Constitutional Court last year.
The Bank argued that the regulations are aimed at curbing capital flight. This defensive position has helped to protect the country’s external reserves, which are among the highest of the largest economies in sub-Saharan Africa. By December, SA’s reserves were worth $40.65bn, a decline of 3.45% in the course of the year.
Compared with rival Nigeria, SA has done quite well. The West African country experienced a 13.07% decline in its reserves in the year, despite central bank governor Godwin Emefiele’s introduction of capital controls in December 2014.
Nigerian reserves declined to $29.1bn from $37.3bn during the year to June 2015.
Data show that the Central Bank of Nigeria’s reserves were wiped out on 19 January last year. Mr Emefiele blamed this on the plunge in oil prices — on which the oil-rich country is heavily dependent — and "speculative foreign exchange activities". In August, he introduced a ban on foreign currency cash deposits into Nigerian banks, only allowing wire transfers into foreign currency accounts.
Angola, similarly dependent on oil exports, saw a sharp 28.79% decline to $25.1bn in gross reserves between September 2013 and last December.
The Banco Nacional de Angola, its central bank, has imposed restrictive foreign exchange measures in response to the depreciation in the oil price.
For those institutional investors who have fallen foul of the Reserve Bank’s exchange regulations, there is a 12-month deadline to fix it without any punishment from the Bank.
"By allowing a time frame of 12 months to correct the contravention, the Bank aims to ensure that institutional investors have a reasonable amount of time to get back to the required asset limits without placing retirement fund savings at a disadvantage," says Mr Niemand.
Offshore portfolios may not add to their allocations during this 12-month period.
Ms Abdurahman says institutional clients may apply for an exemption from the exchange control regulations if it were in their clients’ interests to keep their offshore investments longer than 12 months.
"Fund managers would need to approach their pension fund clients for an instruction and to possibly encourage and assist those clients in applying for an exemption," she says.
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