Old Mutual Investment Group

Macro Perspective 9/2022 | Fund exposure and benefits for local investors

March 01, 2022 Old Mutual Investment Group
Old Mutual Investment Group
Macro Perspective 9/2022 | Fund exposure and benefits for local investors
Show Notes Transcript Chapter Markers

Portfolio Manager, Peter Brooke, shares his latest weekly perspectives, this week focusing on the low fund exposure to Russia as the conflict unfolds and the benefits for local investors from recent exchange control updates.

Peter Brooke  00:00

Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 9 of 2022, and it's been a crazy time for global markets as Russia's invasion of Ukraine unfolds. 

00:13

I have to admit, I was completely wrong on what has happened, as I did not expect Russia to go for an all-out invasion. My belief was driven by the impossibility of holding a country of 40 million people against their will. And the fact that it's a terrible outcome for Russia in the long run. The beneficiary on the other side of this, I think, will be Europe, which will be the biggest winner, as they pull together, increase reform, increase their green energy transition, and start to take responsibility for their insecurity. 

00:45

But we all face a more uncertain future today than a month ago. Thankfully, our funds have enjoyed a good February and effective Russian exposure across our funds is fairly - is low. As an example, our flagship Balanced Fund is less than 40 basis points or 0.4%. However, I do not want to discuss Russia further, because I think last week's budget was actually more important for domestic investors than the war. 

01:13

Slipped into the detail of the budget, in Annexure F if anyone's interested, was a change in exchange controls governing the prudential guidelines for local investors. The rules have changed from 30% allowed offshore with a further 10% for Africa, to 45% allowed offshore, including 10% allowed for Africa. This is an extremely positive change. Firstly, it continues the steady process of exchange control liberalization and realistically, for almost all individual South Africans, there is no effective exchange control. Exchange control over time reduces exchange rate volatility as the offshore assets can come back again, and we get an open market. For instance, South African managers can bring money back when opportunities present themselves, which is exactly what we did in our funds after the Rand crash during Covid and the downgrade to junk status. 

02:12

Secondly, this gives the big pool of South African savings that are in unit trusts, life funds, and importantly, in the whole Regulation 28 space, a big increase in opportunities. Because of bringing Africa in under the 45%, essentially this represents a 50% increase in offshore allocation from 30% to 45%, or 15% of total funds, if we're looking at wider than Africa. Currently, our views about long-term real expected returns and the results and opportunities in South Africa means we are not at our offshore limits. 

However, as markets change, and at the moment South Africa's outperforming offshore, narrowing that valuation differential. The change in regulations will allow us to take advantage of more offshore opportunities. This will likely be a bigger impact for our higher CPI target return offerings, like Balanced Flexible and Max Return. While our more conservative solutions like Real Income, Stable Growth, and Moderate Balanced have static benchmarks that are actually below the 30%. However, for all funds, it creates more scope for larger asset allocation moves, which increases the potential for outperformance. Good news for active asset allocation. This change benefits those asset managers that have the scale to access all the required global building blocks and have the skills to analyze the global universe. 

03:54

In summary, we think this is a profoundly important change for the domestic savings industry, which adds further good news to what was a positive budget. I hope you've enjoyed this perspective. Until next week.

But we all face a more uncertain future today than a month ago. Thankfully, our funds have enjoyed a good February and effective Russian exposure across our funds is fairly - is low. As an example, our flagship Balanced Fund is less than 40 basis points or 0.4%. However, I do not want to discuss Russia further, because I think last week's budget was actually more important for domestic investors than the war. 

01:13

Slipped into the detail of the budget, in Annexure F if anyone's interested, was a change in exchange controls governing the prudential guidelines for local investors. The rules have changed from 30% allowed offshore with a further 10% for Africa, to 45% allowed offshore, including 10% allowed for Africa. This is an extremely positive change. Firstly, it continues the steady process of exchange control liberalisation and realistically, for almost all individual South Africans, there is no effective exchange control. Exchange control over time reduces exchange rate volatility as the offshore assets can come back again, and we get an open market. For instance, South African managers can bring money back when opportunities present themselves, which is exactly what we did in our funds after the Rand crash during Covid and the downgrade to junk status. 

02:12

Secondly, this gives the big pool of South African savings that are in unit trusts, life funds, and importantly, in the whole Regulation 28 space, a big increase in opportunities. Because of bringing Africa in under the 45%, essentially this represents a 50% increase in offshore allocation from 30% to 45%, or 15% of total funds, if we're looking at wider than Africa. Currently, our views about long-term real expected returns and the results and opportunities in South Africa means we are not at our offshore limits. 

However, as markets change, and at the moment South Africa's outperforming offshore, narrowing that valuation differential. The change in regulations will allow us to take advantage of more offshore opportunities. This will likely be a bigger impact for our higher CPI target return offerings, like Balanced Flexible and Max Return. While our more conservative solutions like Real Income, Stable Growth, and Moderate Balanced have static benchmarks that are actually below the 30%. However, for all funds, it creates more scope for larger asset allocation moves, which increases the potential for outperformance. Good news for active asset allocation. This change benefits those asset managers that have the scale to access all the required global building blocks and have the skills to analyse the global universe. 

03:54

In summary, we think this is a profoundly important change for the domestic savings industry, which adds further good news to what was a positive budget. I hope you've enjoyed this perspective. Until next week.

Global markets and Russia’s invasion of Ukraine
The impact of the conflict on Old Mutual funds
Discussing details of the 2022 Budget Speech
Two ways the change in exchange controls impacts South Africans and the savings pool
Closing summary