A shaky local economy last year saw investors taking up all available slack in offshore unit trust funds, writes Sarah Bullen
Offshore was the investment buzzword last year. Local markets hit a wobbly patch, international markets were strong, and suddenly every investor and their little sister wanted their investments handled in Guernsey. And the easiest way in for the small investor was through a professionally managed offshore unit trust.
Old Mutual Asset Management (OMAM) managing director Pieter van Niekerk says that a combination of strong performances of offshore stock markets, fairly volatile local markets and an awareness among investors that their portfolios were still under-diversified globally drew funds towards offshore unit trusts and wrap funds. But by mid-year management companies started announcing they were capping their funds and not taking on any new investors.
Currently almost all offshore unit trusts have reached their offshore limits stipulated by the Reserve Bank’s tight exchange control regulations – which allow unit trusts to invest 15% of their assets under management offshore through asset swaps. A fair number have eclipsed the limit and are currently sitting with around 20% of their assets offshore.
Colin Woodin, chief executive officer of the Association of Unit Trusts of South Africa, said it is actually difficult to put an exact figure to the number of offshore unit trusts that have closed.
Fluctuations in the investment firm’s total assets allow the unit trust to reopen and accept additional funds periodically, he said.
OMAM fund manager Paul Stewart estimates that the industry needs the asset swap limit to be moved up to at least 30% of total assets if it is to be of any consequence to the new investor. He estimates that most management companies are currently sitting with up to 20% of their assets offshore, which means any move smaller than 25% would have little impact.
Woodin agrees. He says that only a move of over 25% will allow international unit trusts to reopen. The government seems intent on sticking to the letter of its stated intention to opt for a gradual easing of exchange control rather than a “big bang” approach. The rationale behind the policy of slow relaxation is the prevention of flight of capital out of the reserves. Economists see the gradual policy as prudent and appropriate for currency stability.
In theory an asset swap should result in neutral reserves as for every outflow of money from the country there should be an equivalent inflow. That rarely occurs in practice, however. ING Barings chief economist Kristina Quattek said that once the initial swap has taken place it becomes very difficult for the authorities to track the assets.
Although the determination of exchange control policy is a consultative process between the Ministry of Finance and the Reserve Bank, the final decision ultimately rests with finance.
The Reserve Bank is the first to admit that exchange control is limited in its effectiveness in preventing volatile movements of forex in the country. But what keeps it there is the “what if” factor.
“There really is no way of knowing what will happen if the controls are suddenly erased,” Quattek said.
With Minister of Finance Trevor Manuel due to present his 2000 budget before Parliament in February, it is widely expected that the 15% limit on asset swaps will be raised, albeit slightly.
The government has not previously made any sudden moves with its exchange control policy, and it is unlikely, economists say, that will change this year.
The government’s first move was in June 1995 when it set the asset swap at 5%. This limit was raised to 10% in 1996 and again to 15% in March 1998.
Last year Reserve Bank governor Chris Stals raised individual allowances from R400 000 to R500E000, but kept the asset swaps limit at 15%.
Stals said, at the time, that companies had only taken advantage of R60-billion of the R130-billion the bank had approved in asset swaps, making a raising of the limit unnecessary. The time is ripe after a year’s break, say economists, for another lifting of limits.
There is an indication, however, that the finance ministry may announce a different policy for calculating offshore allowances.
Van Niekerk says that the shift could be from a calculation of assets to gross sales – but he sees it coming in the second quarter. He says he is hopeful that any shift will give the unit trust industry some preference over the larger life and pension fund industries.
Another strong incentive for a raising of exchange controls is the economic indicators which show that the economic recovery which began in mid-1999 has remained firmly on track through the fourth quarter and is likely to result in a strong economy in 2000.
Exchequer figures for April to December show an 8,4% rise in government revenue, again well in excess of the budgeted full- year increase. Quattek said that this excellent revenue performance plus spending discipline left the fiscal deficit for the nine months April to December at around R18,5-billion, amounting to around 81,7% of the full-year budget deficit of R22,6- billion for 1999/2000, bringing the 2,8% deficit to gross domestic product target for 1999/2000 within reach.
Strong inflows of foreign currency into local markets are expected to allow the Reserve Bank to boost its reserves, easing potential pressure on the rand.
The industry remains hopeful that the 2000 budget will be the appropriate time for the government to make some changes to exchange control that will allow it to reopen offshore unit trusts.
“It would be an appropriate time,” said Stewart, “but I will not be betting the family silverware on it.”