Who would have thought something with such a nondescript name would cause so much controversy? Most of what the government publishes usually goes without being noticed.
With the jargon and legalistic language, it tends to go over people’s heads. How many, for example, would be able to say what “Exchange Control Circular No 9/2020”, issued by the Reserve Bank in August, was about?
Outside the dealers who are moving currency in and out of the country as part of their job, very few will have noticed, let alone understand what it was saying. Which makes the controversy over “Exchange Control Circular No 15/2020” even more remarkable. And the confusion it has caused has prompted renewed questions about capacity and competence at the Treasury.
It all dates back to October 28, when finance minister Tito Mboweni, presenting his medium-term budget policy statement, announced that the government would “take further steps to make cross-border business easier, including inward listings, loop structures and corporate foreign borrowings”.
That was followed a day later by the Reserve Bank issuing a circular that reclassified some inward-listed investments such as exchange traded funds as domestic, provided they were listed locally and traded in rand. For opponents of SA’s exchange controls regime, this was a source of celebration as it meant that investors could sidestep current rules limiting their exposure to offshore funds to 30%.
So instead of tracking the JSE, local investors could in theory buy a fund that mimics the performance of an international index such as the S&P 500 index. Though financial advisers warn against using past performance as a guide to what the future holds, the relative performance of the JSE to its US counterparts makes it clear why this would be appealing.
Over the past decade, an investment in a fund tracking the local index would have walked away with returns of just more than 150%, which looks impressive until you notice that, in rand, the S&P 500 has gained some 700% including reinvested dividends. In dollar terms, the JSE would have given you just 18% compared with 275% on the S&P 500.
If ever there was a case for diversification, this is it. And it’s not just individual investors and corporations who would have been pushing that argument. The pension fund that serves government workers — which has just 6% of its R1.6-trillion of assets offshore — has also made a similar point that increased foreign exposure would enhance returns for its clients.
But it wasn’t meant to be as the circular was unceremoniously recalled last week. What will be disturbing is the amount of time it took from the circular being issued late in October and when it was eventually removed. It beggars belief that the Treasury didn’t notice until more than three weeks later that the circular would have the unintended consequence of removing exchange controls on pension funds.
Crying foul
No wonder some of the companies that would have benefited from the proposed changes, such as Magda Wierzycka’s Sygnia, are crying foul. Wierzycka was among the first to point out how the change would harm the bigger fund managers, which mostly choose individual stocks, even going as far as to say they would try to block it.
Owing to more than a decade of underperformance since the outbreak of the global financial crisis, active managers have been under intense pressure as investors have gone for so-called passive strategies, which involve less buying and selling of shares. Since they follow an index, they are much cheaper and have been growing in popularity due to the perceived lack of value in paying active managers who rarely beat the markets.
The irony of course is that by their nature, passive funds can never beat an index but only mimic it. So far that’s been an advantage as the markets have only seemed to mostly go in one direction, which is up. Seeing how much one could have made just following the S&P 500 over the past decade, it would be tempting to think that the same strategy would work as well for the next 10 years. It could, but putting all one’s retirement eggs in that single basket could turn out to be a risky strategy.
With the government having taken so long — three weeks in which some service providers were acting as if the prudential limits were removed and selling products accordingly — to assess the impact of the proposed changes has given rise to suspicion that the big players acted to block the changes.
That’s what has sparked a public dispute between Wierzycka and the Association for Savings and Investment SA (Asisa), which is supposed to represent the fund industry as a whole, including Sygnia. She accused the body of doing the bidding of the bigger asset managers, naming Coronation and Ninety One. Asisa CEO Leon Campher denied this and said the body had only sought clarity as there was confusion as to whether the offshore limits existed.
Given the timing from when Mboweni made the announcement, to Asisa’s letter and the recalling of the circular, it is clear Wierzycka and others questioning Asisa’s role won’t be convinced. This could all have been avoided if the Treasury had done its job in the first place and done a proper assessment of the implications of its new rules.
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