JOHANNESBURG -- South African plan sponsors and money managers are disappointed that Finance Minister Trevor Manuel has made no move toward lifting limits on offshore investing by domestic institutions.
Many plan sponsors had been expecting Mr. Manuel to raise the amount pension plans could invest offshore to 20% from 15% of total assets when he unveiled his budget for 2000-01 in late February.
Instead, Mr. Manuel announced the increase would apply only to mutual funds, known locally as unit trusts, and he made no concessions to domestic pension plans or insurers.
"We are definitely disappointed. We had expected an increase to 20% of assets, but the government seems to be going slowly on lifting exchange controls," said Johan Potgieter, deputy general manager-services at the 12 billion rand ($1.9 billion) Iscor Pension Fund, Johannesburg.
The South African government last increased offshore investment limits in 1998 by 5 percentage points to 15%.
Frans Mahlangu, principal executive officer of the 4 billion rand Mineworkers Provident Fund, Johannesburg, said the lack of flexibility for foreign investments was particularly bad in light of the increased tax burden on domestic pension plans.
In his budget speech, Mr. Manuel introduced a capital gains tax that would effectively tax institutional investors on capital gains at between 6% and 10%. And last year a 25% tax was introduced on interest-bearing instruments held by local pension plans.
"These taxes are hitting at the poorest of the poor. For many people, the pension fund is their sole investment," he said.
Ken Morgan, managing director of Metal Industries Benefit Fund Administrators, Johannesburg, agreed with Mr. Mahlangu, saying: "Pension funds have been targeted from a tax perspective over the last few years. We are looking for some kind of relief to diversify offshore and reduce the domestic risk."
The MIBFA is responsible for administering the assets of the 8.6 billion rand defined contribution Metal Industries Provident Fund and the 18.9 billion rand defined benefit Engineering Industries Pension Fund, both of Johannesburg.
Mr. Manuel did, however, announce a technical change to the amount that could be taken offshore by stating 15% of total pension assets could be invested outside South Africa. During 1998 and 1999 the limit of 15% was based on domestic assets.
The change in the wording, seen as a correction to a mistake made in 1998, effectively means pension plans that calculated their offshore investment on the basis of their domestic assets could now invest an additional 2% internationally, said Ralph Frank, asset consultant for Alexander Forbes Financial Services, Johannesburg.
But international money managers should not expect a flood of new business, he added. Most local pension plans already are invested up to their statutory limit according to total assets. In many cases the growth in international markets means many plans are overexposed and could be inadvertently holding as much as 20% of the fund in non-domestic assets.
"The reality is that any plan who put 15% of their domestic assets overseas in 1998 would be way over that limit now due to the relative performance of international markets against the Johannesburg Stock Exchange," said a Cape Town-based international investment consultant, who asked not to be identified.
Mr. Manuel also left the asset swap mechanism -- where an offshore investment by a South African institution must be exactly matched with an investment in the local market by a non-domestic investor -- in place but increased to 10% from 5% the portion of net cash inflows from the previous financial year that an institution can invest offshore without going through an asset swap.
Alexander Forbes' Mr. Frank said the move was welcome, as the asset swap procedure was cumbersome and costly. But, he said, offshore fund flows resulting from the concession would be limited, as most pension plans are fully invested internationally.
The Transnet Pension Fund is one heavyweight domestic plan, however, that has not reached its limit for international investments and later this year plans to invest in international assets a further 9% of the 35 billion rand fund for the employees of the state railway system, according to investment manager Esmarie Strydom. Approximately 6% of the fund is held in international assets that are managed by Bank of Ireland Asset Management Ltd., London; Brandes Investment Partners LP, San Diego; Lazard Asset Management, New York; SEI Asset Management Group, Oaks, Pa.; and Orbis Investment Fund, Bermuda.
The plan is restructuring to close its defined benefit plan to new members and launch a defined contribution plan. Once that is complete in early July, the trustees will review the current asset allocation, said Ms. Strydom.
According to Mr. Morgan, approximately 13% of both the Metal Industries Provident Fund and the Engineering Industries Pension Fund is invested internationally. The trustees of each plan will, during the second half of this year, consider how to increase non-domestic exposure to the 15% limit. The allocations to the current managers either will be increased or the trustees will consider hiring an international bond manager in order to diversify the offshore holdings.
Brandes Investment Partners, MSDW Investment Management and Bank of Ireland each manage a third of the two plans' international portfolios.
Iscor's Mr. Potgieter said increasing the limit for unit trusts was unfair but it had been done to silence the vocal lobby of domestic mutual fund managers. Because the unit trust market in South Africa is relatively small, outflows of capital would not disrupt the domestic market. The unit trust industry represents roughly 130 billion rand of the 1 trillion rand estimated to be invested in pension plans, insurance vehicles and savings schemes such as unit trusts.
But Hendrik du Toit, chief executive of Investec Guinness Flight Ltd., London, welcomed Mr. Manuel's decision to make no radical changes to exchange controls.
"It is so easy to upset the rand price with a very big flow of funds either way. It is good to keep flows stable, but there is no doubt that over time the government intends to lift the level to 25% of assets," he said.
One source close to the Ministry of Finance said the ceiling had remained at 15% for pension plans to act as a "prudential limit" for domestic institutional investors. But Suzanne Gordon-Brown, U.K. and South Africa business development director at Morgan Stanley Dean Witter Investment Management Ltd., London, said that reasoning was unlikely since it made no sense in an emerging market.
An international investment limit of 15% of assets is very low, as the domestic economy in South Africa is relatively risky and volatile, she added.
Transnet's Ms. Strydom said the optimum level of international investments for her plan would be 30% of total assets.
"All of us want to be as high as 30%," she added.