Wisely?

CityPress - - Tenders -

Over the past two years, there have been me­dia re­ports of con­tentious in­vest­ment de­ci­sions by the Pub­lic In­vest­ment Cor­po­ra­tion (PIC), which man­ages the as­sets on be­half of the Govern­ment Em­ploy­ees’ Pen­sion Fund (GEPF).

Some deals that were struck raised ques­tions around whether un­due in­flu­ence by govern­ment drove the in­vest­ment de­ci­sions into busi­nesses whose own­ers were po­lit­i­cally con­nected, such as a R3 bil­lion in­vest­ment in Ca­mac En­ergy (now Erin En­ergy) and the R3.9 bil­lion buy­out of ArcelorMit­tal’s share of Kala­gadi Man­ganese.

Crit­ics have also ar­gued that the GEPF – and mem­bers’ re­tire­ment money – was be­ing used by govern­ment to bail out an ail­ing Eskom and to keep Sanral afloat amid the e-toll de­ba­cle with the PIC’s pur­chase of Sanral and Eskom bonds.

GEPF prin­ci­pal ex­ec­u­tive of­fi­cer Abel Sit­hole de­nies this and says the fund’s man­date is to pre­serve cap­i­tal and pro­vide a good re­turn rel­a­tive to li­a­bil­i­ties (pay­ments), and only those in­vest­ments that meet the man­date will be con­sid­ered.

The GEPF is the largest pen­sion fund in South Africa – it’s worth about R1.7 tril­lion – and, as such, it ac­counts for about 17% of the to­tal value of the JSE.

“With this amount of money to in­vest, the fund has ex­po­sure to the whole South African econ­omy and one has to look at its in­vest­ments in that con­text,” ex­plains Sit­hole, who de­fends the de­ci­sion by the fund to buy Eskom and Sanral bonds be­cause they meet the cri­te­ria of cap­i­tal preser­va­tion and re­turns.

As both Sanral and Eskom bonds are guar­an­teed by govern­ment, mem­bers’ funds are not at risk and the bonds of­fered at­trac­tive in­ter­est rates if held to ma­tu­rity.

“We are very ex­posed to the econ­omy as a whole through our in­vest­ments on the JSE. If Eskom col­lapses, that is a sys­temic risk to the econ­omy and there­fore all our in­vest­ments,” ex­plains Sit­hole.

The in­vest­ment in Sanral was R18.6 bil­lion, but Sit­hole says it makes up 1% of the GEPF’s to­tal in­vest­ment port­fo­lio, and is there­fore not a sig­nif­i­cant in­vest­ment.

“The GEPF is not the only fund that in­vests in Sanral and Eskom; many oth­ers do too,” says Sit­hole.

Ian Cruick­shanks, chief econ­o­mist at the In­sti­tute of Race Re­la­tions, says that while mem­bers are not be­ing un­rea­son­able when rais­ing their con­cerns, the per­for­mance of the fund man­aged by the PIC has per­formed very well at this stage, com­pared with other pen­sion in­vest­ment com­pa­nies in the pri­vate sec­tor.

“So far, it seems that the PIC has used strict in­vest­ment cri­te­ria. The con­cern, how­ever, is that as govern­ment fi­nances come un­der strain, they may be tempted to use govern­ment em­ploy­ees’ pen­sion money to fund govern­ment projects that are not jus­ti­fied from an in­vest­ment point of view. We need to be vig­i­lant,” says Cruick­shanks.

He ex­plains that un­der the pre­vi­ous regime, the govern­ment pen­sion fund was used to pro­vide cheap sources of fund­ing for govern­ment un­der the pre­scribed in­vest­ment man­date. This oc­curred in the 1980s be­cause of the con­tin­ued iso­la­tion of South Africa af­ter then prime min­is­ter PW Botha’s in­fa­mous Ru­bi­con speech. South Africa’s in­ter­na­tional fund­ing dried up and the econ­omy grew at less than 1% a year over a decade.

“This has hap­pened be­fore, and peo­ple are un­der­stand­ably con­cerned that it could hap­pen again,” says Cruick­shanks.

The PIC in­vests 75% to 80% of the fund in pas­sive funds, which track the av­er­age re­turn of the mar­kets, which helps keep the costs of the fund low. The re­main­der is al­lo­cated to ac­tive fund man­agers to pro­vide en­hanced re­turns. The PIC also takes di­rect stakes in non-listed as­sets, in­clud­ing prop­erty.

The fund may in­vest up to 10% of its equity ex­po­sure off­shore – this is sub­stan­tially lower than the 25% limit on other re­tire­ment funds. Cur­rently, 5% is in­vested abroad.

In 2010, the GEPF launched the de­vel­op­men­tal in­vest­ment pol­icy, which adopted a four-pil­lar ap­proach to de­vel­op­men­tal in­vest­ing: eco­nomic in­fra­struc­ture; so­cial in­fra­struc­ture; en­vi­ron­men­tal in­vest­ments; and en­ter­prise de­vel­op­ment (in­clud­ing BEE and job cre­ation).

This in­cludes sup­port­ing BEE fund man­agers and the de­vel­op­ment of an in­cu­ba­tion fund for new black fund man­agers.

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