Impact investors an alternative to ‘unevolved’ asset consultants
Forbes’s Benefits Barometer points to long-term merits of delivery of schools and housing
The Alexander Forbes Benefits Barometer sounds like a useful, snapshot service. Initially designed as a counterpoint to its investmentfocused Manager Watch, it was planned to focus on the health of employee benefits structures around SA.
I made myself unpopular in the office recently when I tried to print out the new barometer, which is 479 pages long. The tome is produced by the Forbes Research Institute. Under the institute’s strong-willed head, Anne Cabot-Alletzhauser, the barometer resembles the Beveridge Report, the founding document of the British welfare state, with some of the recent National Development Plan thrown in.
With topics such as “multistakeholder collaboration, social impact bonds” and “value chain aligned programmes”, you can see this won’t be mistaken for the sequel to Goldfinger. But I was pleased to see the barometer take an interest in impact investing. And while this might not be as riveting as Game of Thrones, it is a critical topic that deserves our attention.
Impact investing is at least a good, eye-catching name without any of the sanctimoniousness of socially responsible investing (SRI). You can point to schools and hospitals built with your money, whereas the benefits of SRI tend to be far more nebulous. Cabot-Alletzhauser has never been happy with the widely held view that asset managers have only one duty — to make money for their clients.
In fact, she argues that shorttermism has hampered the capacity to compete in international markets — not that fund managers behave any differently elsewhere — and the pursuit of listed equities has diverted resources from needed investments in innovation and led to increased inequality. It is certainly a winner-takes-all environment, with more than half of the R4.6 trillion of total invested assets managed by the five largest asset managers.
The only way to break this, she argues, is for asset managers to offer different strategies and ideally to invest in new asset classes. It is no accident that few black-owned asset managers have broken into the magic circle, as most offer listed equity and nothing else.
Says Cabot-Alletzhauser: “Demonstrate that you can start tackling problems where SA has a burning funding issue, and people may well sit up and take notice.” She says investment businesses need to reinvent themselves so they benefit both clients and society, otherwise they could see their licences to operate revoked.
Even the chartered financial analysts (CFAs) are changing from unthinking disciples of Harry Markowitz’s modern portfolio theory to viewing success one brick at a time. The CFA Institute is discouraging adrenalin junkies with a shortterm mindset from joining its ranks. But it won’t take place overnight — those junkies will be around for a few more years.
There is already a wellrounded impact fund suite at Old Mutual, which includes housing, schools and retirement accommodation. It has had the privilege of deploying funds from the life office balance sheet, by its nature a patient investor.
The barometer argues that investing in listed companies is by no means the best way to create jobs: it might not even be the best place to get the reliable inflation-beating returns retirement funds need.
Listed companies are in a mature phase and are often reluctant to invest for the future. Most of their spare capital is used for share buybacks.
And an investment in the JSE is hardly an investment in the South African economy as about two-thirds of revenue is from overseas. At some point the supply of capital in our retirement funds, life insurers, unit trusts and elsewhere has to dovetail with the demand for better education, health and physical infrastructure. It would mean a change in mindset from daily pricing and full liquidity.
Yet internationally impact investing is growing by 15% to 18%. It helps that it has a strong multiplier effect when it comes to creating jobs and wealth, in contrast to the often greedy and rapacious image of hedge funds and private equity, the other alternative classes.
SA now has its own social impact co-ordinator under the catchy name of the South African Social Impact Investing National Advisory Board, which will help the public and private sectors work together. In SA a strong case could be made for more efficient and cheaper delivery of schools and other goods through the private sector than simply by a state department out of taxpayers’ money.
The barometer blames asset consultants for their conservative thinking. This could be called biting the hand that feeds you, as Alexander Forbes is SA’s dominant consulting firm.
Cabot-Alletzhauser calls consultants “unevolved” as they focus on past performance and show little interest in alternatives. In SA, the JSE has provided quite reliable returns over the long term, so there has been no incentive to look elsewhere.
It has also been quite difficult to persuade most fund trustees to consider anything outside the standard suite of assets, and there has often been rotation of trustee boards.
And many consultants have not kept up to date with the latest risk budgeting tools.
Assessing impact investment involves a different skill set, even if in theory there is no difference as all investments aim to achieve attractive returns. The skill set for managing impact investments is also different. The fast-talking CFA in a suit simply won’t crack it. He or she will have to unlearn all that Gaussian probability stuff. They will need to invest in a pair of boots and learn to get their hands dirty.
A private manager, in a fit of altruism, would make a better impact investor, as they are accustomed to the hands-on approach — but they would have to ditch the Maserati.
A CASE COULD BE MADE FOR EFFICIENT DELIVERY OF SCHOOLS AND OTHER GOODS THROUGH THE PRIVATE SECTOR