Regulation 28 and the paradox of choice

Decision-makers are grappling with Regulation 28 and the paradox of choice: the breadth of options increases flexibility, but it’s more difficult to choose high-quality, consistent winners and blend them in their appropriate proportions.

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Regulation 28 and the paradox of choice

In 2022, Finance Minister Enoch Godongwana amended the maximum offshore investment limit for Regulation 28 retirement funds from 30% of assets to 45%. However, data shows that most funds haven’t maximised their exposure to the new limit.

Currently, there is more value to be extracted in the local market: local equities are trading on a very cheap forward price-to-earnings multiple of 9x (compared to 17x for developed markets) and underpinned by strong one-year expected consensus earnings growth of 14% (compared to 7% for developed markets); the local long bond market offers enticing value, with a more predictable nominal long-term expected yield of 12% against inflation nudging at 5% and the rand offers a 20% discount to the fair value range against the US dollar. Conversely, if Regulation 28 funds use their rand income to increase US dollar-denominated assets, they’re currently paying 20% above the currency’s fair value range.

How do financial advisors prudently assist their clients to navigate the new Regulation 28 changes? Decision-makers are grappling with the paradox of choice: the breadth of options increases flexibility, but it’s more difficult to choose high-quality, consistent winners and blend them in their appropriate proportions.

It’s most important for managers to have an investment philosophy, objectives and investment process that are clearly defined. The investment philosophy should articulate core investment beliefs and principles of how investment value is extracted and risk-managed, expected patterns of returns, inputs required and evidence of repeatable outcomes. Tactical asset allocation and risk management are key in exploiting short- to medium-term opportunities, as well as unintended risks.

Managers need to have a solid grasp of their portfolio risk management on a look-through basis: this allows them to understand exposure from various perspectives, be more responsive and continually reinvent themselves as they align portfolios with changing times. Portfolio risk management can identify and de-risk outsized risk contributions from geographical and sector exposures. Good managers reduce foreign currency volatility. Investment firms must aspire to be great stewards and fiduciaries with the highest ethics, have an enabling culture and be aligned with their clients’ interests.

For financial advisors looking to prudently exploit the changes to Regulation 28, the point of departure is always going to be choosing the appropriate investment manager(s) who will in turn make appropriate choices on their behalf.


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