Imagine you could boost your retirement savings simply by taking advantage of the gift government gave investors in 2022 when it increased the annual offshore portfolio allowance from 30% to 45%? Iva Madjarova, Head of Institutional Business at Sygnia, explains how the asset manager is helping clients to do just that.
If you’re not worried about the depreciating Rand’s impact on your retirement savings, here’s a stark wake up call: as of February 2024, the Rand had depreciated against the US dollar by 17% in two years. This is, unfortunately, not an anomaly but a solid, decade long trend: as of February 2024, the Rand had depreciated against the US dollar by 38% in five years; and by 70% in 10 years.
The declining Rand trend is likely to hold steady or perhaps even escalate in the foreseeable future considering that key factors contributing to the Rand’s depreciation continue to plague South Africa, namely: the electricity crisis, unemployment, resource draining state enterprises and the disproportionately small number of taxpayers versus government grant recipients (roughly 11% versus 47%, according to recent SARS and SASSA data respectively).
At the same time as the Rand has continued to shed value several major economic superpowers have bounced back after the Covid-19 crisis, regaining currency dominance and contributing significantly to global economic growth with high performing equity stocks.
For South African investors, all this can be distilled down to a simple equation: a higher percentage of domestic equity investment in your retirement portfolio currently equals lower overall returns, whereas a higher percentage of offshore equity investment will likely equal higher returns.
Therefore, in our view, the wisest move investors can make to boost their retirement savings amidst South Africa’s depressed market is to take full advantage of the gift government gave us in 2022 when it increased the annual offshore portfolio allowance from 30% to 45%.
New funds to maximise offshore exposure
It was with this in mind that Sygnia recently launched Skeleton Pro and Signature Pro, the next level versions of our Sygnia Skeleton and Sygnia Signature ranges of retirement savings funds.
The only major difference between the standard Skeleton and Signature funds and the pro versions is simply that the Skeleton Pro and Signature Pro fund ranges automatically maximise the full offshore allowance (up to 45%) allowed by Regulation 28 of the Pension Funds Act. In addition, the two new Pro fund ranges maximise overall equity exposure (up to 75%).
With Rand depreciation showing no signs of abating any time soon, we are confident that further diversifying retirement investment portfolios by maximising offshore and equity investment is currently the best opportunity investors can give themselves to retire comfortably.
In addition, by maximising both your full offshore and equity investment allowances, you open up more opportunity to invest in the broader world of investment and in exciting stocks like the “Magnificent 7” – the group of US stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) that have far outpaced the rest of the S&P 500 since the market low of October 2022.
Higher risk, higher rewards
Upping your full offshore investment and equity investment allowances to the max is a higher risk investment strategy. But it is one that should significantly reward investors over the long term, especially in terms of current market conditions.
For example, we ran NAV-based modelling for Sygnia’s standard Skeleton and Signature fund ranges, which invest 30% offshore. The modelling showed that if this 30% offshore allocation had been increased to the maximum 45% between 2022 and 2023, the funds’ cumulative investment performance would have grown by an additional 2-5%. Add growth via compound interest over time to this equation and that 2 to 5% makes a massive difference to retirement outcomes.
The modelling also showed that there is a direct correlation between risk and reward. The low risk Skeleton 40 and Signature 40 funds would have grown by an average of 2% if the full offshore and equity investment allowance had been allocated, while the higher risk Skeleton 70 and Signature 70 funds would have grown by an average of 5%.
Although this historic modelling is not a foolproof predictor of future performance – because no one can predict the exchange rate nor the growth of stocks – these results are a fairly good indicator of what to expect if you maximise both your offshore and equity investment allowances for retirement savings.
Remember, too, that you can further control risk exposure by selecting a fund that matches your appetite, with both the Skeleton Pro and Signature Pro ranges each offering four funds (40, 50, 60 and 70) of varying risk. Skeleton Pro 40 and Signature Pro 40 are the lowest risk, with each fund thereafter (50 and 60) increasing in risk up to the highest risk Skeleton Pro 70 and Signature Pro 70 funds.
In addition, the two new pro fund ranges themselves provide investors with choice in terms of cost. Whereas the Skeleton Pro fund range is fully passively managed, the Signature Pro fund range is a blend of passive and active management. So you can invest passively via a Skeleton Pro fund at very low cost, or choose a Signature Pro fund with an active/passive management strategy for a slightly higher cost, with the expectation of higher returns.
Your best chance at a comfortable retirement
The launch of the Skeleton Pro and Signature Pro fund ranges is a proactive move by Sygnia to give clients the best opportunity to boost their retirement savings in context of a depressed domestic market. Because maximising offshore and equity investment allowances within your retirement portfolio is, in our view, currently the best strategy to achieve the highest probability of reaching a comfortable retirement.
Ultimately, the Skeleton Pro and Signature Pro fund ranges are ideal for investors who agree with our prediction that the Rand will continue to depreciate over the long term, and that the rest of the world offers a better investment opportunity set.